[The following is a guest post from Neil Chilson, a senior research fellow with the Center for Growth and Opportunity at Utah State University and former chief technologist of the Federal Trade Commission.]
The Federal Trade Commission (FTC) last week held its first informal hearing in 20 years on Section 18 rulemaking. The hearing itself had a technical delay, which to us participants felt like another 20 years, but was a mere two hours or so.
At issue is a proposed rule intended to target impersonation fraud. Impersonation fraudsters hold themselves out as government officials or company representatives in order to defraud unsuspecting consumers.
I was one of 13 individuals who requested to speak at the informal hearing. My interest is as a consumer with a stake in efficient and effective fraud enforcement and as a former FTC employee proud of the anti-fraud work I contributed to. What follows is adapted from my remarks.
Imposter Fraud Deserves a Good Rule
As the record clearly shows, imposter fraud is a too-common occurrence and costs consumers and businesses millions of dollars a year. We need a good rule here—one that effectively targets fraud with minimal impact on lawful behavior and that it is legally sustainable.
To that end, two points. First, the rule as written, unlike every other Section 18 rule, is broader than Section 5 and ought to be narrowed. Second, the FTC caselaw is indefinite on the contours of means and instrumentalities. The record shows that this provision is already being misunderstood. The FTC should correct this misperception.
Together, these issues mean that this proceeding has likely failed to put potentially affected parties on notice, leaving a factual gap in the record and in the agency’s regulatory impact analysis.
The Text of the Rule Is Overly Broad
This proceeding is targeted at addressing impersonation frauds and scams in commerce—acts that clearly violate Section 5.
Yet the rule as written declares unlawful activities that would not violate Section 5’s prohibition on deceptive acts or practices. The rule does not reference “unfairness” or “deception” or note that prohibited activities must be in commerce.
On its face, the draft rule would prohibit a comedian from impersonating Elon Musk; John Ratzenberger from portraying a mailman; or a kid from dressing up as Abraham Lincoln. With the means and instrumentalities provision, it would appear to be “unlawful” to even provide an Abraham Lincoln costume to said child.
Of course, courts would not permit such overbroad applications of the rule. And it seems unlikely that this FTC would spend its resources pursuing cases that the courts would reject out of hand. But rules should be written assuming that some future leadership might seek to abuse them, perhaps to chill unflattering portrayals of national politicians.
The notice of proposed rulemaking (NPRM) states that Section 5 hems in the broad language of the rule. But that gets the purpose of FTC rulemaking backward. The text of the rule should clearly delimit a subset of practices prohibited by Section 5, not the other way around. Indeed, everyone of thesixpastrules created through Section 18 has been written as a subset of Section 5. Every one of them specifies in text that the prohibited conduct is “in commerce.” Each one also describes the prohibited conduct as either an “unfair act or practice” or a “deceptive act or practice” or both.
It is a deceptive act or practice for any used vehicle dealer, when that dealer sells or offers for sale a used vehicle in or affecting commerce as commerce is defined in the Federal Trade Commission Act … to misrepresent the mechanical condition of a used vehicle…
Adding similar language to the draft impersonation rule would be simple and would still achieve the goals of the proceeding. And it would better match the text of the rule to the NPRM’s description of the rule’s scope, helping to cure some of the notice concerns.
Means and Instrumentalities
The second matter is the “means and instrumentalities” provision. I echo the value of having a knowledge requirement. As former FTC Bureau of Consumer Protection (BCP) Director Jessica Rich has noted, there has been debate over the years about the contours of means and instrumentalities, with some commissioners saying that others are using it as a substitute for “aiding and abetting,” a form of secondary liability not within Section 5.
Indeed, some parties in this record have made this mistake. The FTC must clearly articulate the proper scope of the rule, potentially by putting the standard for means and instrumentalities in the rule itself.
To the extent the standard for applying means and instrumentalities liability under Section 5 is itself unclear, it is not a good candidate for rulemaking.
More, and not just about noncompetes, but first, yes (mea culpa/s’lach lanu), more about noncompetes.
Yesterday on Truth on the Market, I provided an overview of comments filed by the International Center for Law & Economics on the Federal Trade Commission’s (FTC) proposed noncompete rule. In addition to ICLE’s Geoffrey Manne, Dirk Auer, Brian Albrecht, Gus Hurwitz, and myself, we were joined in our comments by 25 other leading academics and former agency officials, including former chief economists at the U.S. Justice Department’s (DOJ) Antitrust Division and a former director of the FTC’s Bureau of Economics.
Not to beat a dead horse, but this is important, as it’s the FTC’s second-ever attempt to promulgate a competition rule under a supposed general rulemaking authority, and the first since the unenforced and long-ago rescinded rule on the Men’s and Boys’ Tailored Clothing Industry, initially adopted in 1967. Not incidentally, this would be a foray into regulation of the terms of labor agreements across the entire economy, on questionable authority (and certainly no express charge from Congress).
Asheesh Agarwal submitted comments reviewing legal concerns and risks to the FTC’s authority on behalf of a number of FTC alumni, including, among others, two former directors of the FTC’s Bureau of Economics; two former FTC general counsels; a former director of the FTC’s Office of Policy Planning; a former FTC chief technologist; a former acting director of the FTC’s Bureau of Consumer Protection; and me.
American Bar Association comments that critique the use of noncompetes for low-wage workers but stop short of advocating FTC regulation are here. For an academic pro-regulatory perspective, there were comments submitted by professors Mark Lemley and Orly Lobel.
That’s a lot, I know, but these really do explore different issues, and there really are quite a few of them. No lie.
Bringing the Axon Down
As a reward for your patience—or your ability to skip ahead—now for the week’s other hot issue: the U.S. Supreme Court’s decision in Axon Enterprise Inc. v. FTC, which represented a 9-0 loss for the commission (and for the U.S. Securities and Exchange Commission). Does anybody remember the days—not so long ago, if not under current leadership—when the commission would win unanimous court decisions? Phoebe Putney, anyone?
A Bloomberg Law overview of Axon quoting my ICLE colleague Gus Hurwitz is here.
The issue in Axon might seem a narrow one at the intersection of administrative and constitutional law, but bear with me. Enforcement of the FTC Act and the SEC Act often follow a familiar pattern: an agency brings a complaint that, if not settled, may be heard by an administrative law judge (ALJ) in a hearing inside the agency itself. In the case of the FTC, a decision by the ALJ can be appealed to the commission itself. Thus, if the commission does not like the ALJ’s decision, it can appeal to itself.
As a general matter, once embroiled in such “agency process,” a defendant must “exhaust” the administrative process before challenging the complaint (or appealing an ALJ or commission decision) in federal court. That’s known as the Doctrine of Exhaustion of Administrative Remedies (see, e.g., McKart v. United States). The doctrine helps to conserve judicial resources, as the courts do not have to consider every challenge (including procedural ones) that arises in the course of administrative enforcement.
The disadvantage, for defendants, is that they may face a long and costly process of agency adjudication before they ever get before a federal judge (some FTC Act complaints initially are brought in federal court, but set that aside). That can exert substantial pressure to settle, even when defendants think the government’s case is a weak one.
At issue in Axon, was the question of whether a defendant had to exhaust agency process on the merits of an agency complaint before bringing a constitutional challenge to the agency’s enforcement action. The agencies said yes, natch. The unanimous Supreme Court said no.
To put the question differently, do the federal district courts have jurisdiction to hear and resolve defendants’ constitutional challenges independent of exhaustion? “The answer is yes,” said the Supreme Court of the United States. According to the court—and reasonably—the agencies don’t have any special expertise on such constitutional questions, even if they have expertise in, say, competition or securities policy. On fundamental constitutional questions, defendants can get their day in court without exhausting agency process.
So, what difference does that make?That remains to be seen, but perhaps more than it might seem. On the one hand, the Axon decision did not repudiate the FTC’s substantive expertise in antitrust (or consumer protection) or its authority to enforce the FTC Act. On the other hand, enforcement is costly for enforcers, and not just defendants, and the FTC is famously—as evidenced by its own recent pleas to Congress for more funding—resource-constrained, to an extent that is said to impair its ability to enforce the FTC Act.
While we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.
The Axon decision means, among other things, that the FTC’s average litigation costs are bound to rise, as we’ll doubtless see more constitutional challenges.
But perhaps there’s more to it than that. At least two of the nine justices—Thomas, in a concurring opinion, and Gorsuch, concurring with the decision—signaled an appetite to further rein-in the agencies. And doing so would be part-and-parcel with a judicial trend against deference to administrative agencies. For example, in AMG Capital Management, the Supreme Court narrowly interpreted the commission’s power to obtain equitable remedies, and specifically monetary remedies, repudiating established commission practice. And in West Virginia v. EPA, the court demonstrated concern with the breadth of the administrative state; specifically, it rejected the proposition that courts defer to agency interpretations of vague grants of statutory authority, where such interpretations are of major economic and political import.
Where this will all end is anybody’s guess. In the near term, Axon will impose extra costs on the FTC. And the commission’s broader bid to extend its reach faces an uphill battle.
[This post from Jonathan M. Barnett, the Torrey H. Webb Professor of Law at the University of Southern California’s Gould School of Law, is an entry in Truth on the Market’s continuing FTC UMC Rulemaking symposium. You can find other posts at thesymposium 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 its Advance Notice for Proposed Rulemaking (ANPR) on Commercial Surveillance and Data Security, the Federal Trade Commission (FTC) has requested public comment on an unprecedented initiative to promulgate and implement wide-ranging rules concerning the gathering and use of consumer data in digital markets. In this contribution, I will assume, for the sake of argument, that the commission has the legal authority to exercise its purported rulemaking powers for this purpose without a specific legislative mandate (a question as to which I recognize there is great uncertainty, which is further heightened by the fact that Congress is concurrently considered legislation in the same policy area).
In considering whether to use these powers for the purposes of adopting and implementing privacy-related regulations in digital markets, the commission would be required to undertake a rigorous assessment of the expected costs and benefits of any such regulation. Any such cost-benefit analysis must comprise at least two critical elements that are omitted from, or addressed in highly incomplete form in, the ANPR.
The Hippocratic Oath of Regulatory Intervention
There is a longstanding consensus that regulatory intervention is warranted only if a market failure can be identified with reasonable confidence. This principle is especially relevant in the case of the FTC, which is entrusted with preserving competitive markets and, therefore, should be hesitant about intervening in market transactions without a compelling evidentiary basis. As a corollary to this proposition, it is also widely agreed that implementing any intervention to correct a market failure would only be warranted to the extent that such intervention would be reasonably expected to correct any such failure at a net social gain.
This prudent approach tracks the “economic effect” analysis that the commission must apply in the rulemaking process contemplated under the Federal Trade Commission Act and the analysis of “projected benefits and … adverse economic effects” of proposed and final rules contemplated by the commission’s rules of practice. Consistent with these requirements, the commission has exhibited a longstanding commitment to thorough cost-benefit analysis. As observed by former Commissioner Julie Brill in 2016, “the FTC conducts its rulemakings with the same level of attention to costs and benefits that is required of other agencies.” Former Commissioner Brill also observed that the “FTC combines our broad mandate to protect consumers with a rigorous, empirical approach to enforcement matters.”
This demanding, fact-based protocol enhances the likelihood that regulatory interventions result in a net improvement relative to the status quo, an uncontroversial goal of any rational public policy. Unfortunately, the ANPR does not make clear that the commission remains committed to this methodology.
Assessing Market Failure in the Use of Consumer Data
To even “get off the ground,” any proposed privacy regulation would be required to identify a market failure arising from a particular use of consumer data. This requires a rigorous and comprehensive assessment of the full range of social costs and benefits that can be reasonably attributed to any such practice.
The ANPR’s Oversights
In contrast to the approach described by former Commissioner Brill, several elements of the ANPR raise significant doubts concerning the current commission’s willingness to assess evidence relevant to the potential necessity of privacy-related regulations in a balanced, rigorous, and comprehensive manner.
First, while the ANPR identifies a plethora of social harms attributable to data-collection practices, it merely acknowledges the possibility that consumers enjoy benefits from such practices “in theory.” This skewed perspective is not empirically serious. Focusing almost entirely on the costs of data collection and dismissing as conjecture any possible gains defies market realities, especially given the fact that (as discussed below) those gains are clearly significant and, in some cases, transformative.
Second, the ANPR’s choice of the normatively charged term “data surveillance” to encompass all uses of consumer data conveys the impression that all data collection through digital services is surreptitious or coerced, whereas (as discussed below) some users may knowingly provide such data to enable certain data-reliant functionalities.
Third, there is no mention in the ANPR that online providers widely provide users with notices concerning certain uses of consumer data and often require users to select among different levels of data collection.
Fourth, the ANPR unusually relies substantially on news websites and non-peer-reviewed publications in the style of policy briefs or advocacy papers, rather than the empirical social-science research on which the commission has historically made policy determinations.
This apparent indifference to analytical balance is particularly exhibited in the ANPR’s failure to address the economic gains generated through the use of consumer data in online markets. As was recognized in a 2014 White House report, many valuable digital services could not function effectively without engaging in some significant level of data collection. The examples are numerous and diverse, including traffic-navigation services that rely on data concerning a user’s geographic location (as well as other users’ geographic location); personalized ad delivery, which relies on data concerning a user’s search history and other disclosed characteristics; and search services, which rely on the ability to use user data to offer search services at no charge while offering targeted advertisements to paying advertisers.
There are equally clear gains on the “supply” side of the market. Data-collection practices can expand market access by enabling smaller vendors to leverage digital intermediaries to attract consumers that are most likely to purchase those vendors’ goods or services. The commission has recognized this point in the past, observing in a 2014 report:
Data brokers provide the information they compile to clients, who can use it to benefit consumers … [C]onsumers may benefit from increased and innovative product offerings fueled by increased competition from small businesses that are able to connect with consumers that they may not have otherwise been able to reach.
Given the commission’s statutory mission under the FTC Act to protect consumers’ interests and preserve competitive markets, these observations should be of special relevance.
Data Protection v. Data-Reliant Functionality
Data-reliant services yield social gains by substantially lowering transaction costs and, in the process, enabling services that would not otherwise be feasible, with favorable effects for consumers and vendors. This observation does not exclude the possibility that specific uses of consumer data may constitute a potential market failure that merits regulatory scrutiny and possible intervention (assuming there is sufficient legal authority for the relevant agency to undertake any such intervention). That depends on whether the social costs reasonably attributable to a particular use of consumer data exceed the social gains reasonably attributable to that use. This basic principle seems to be recognized by the ANPR, which states that the commission can only deem a practice “unfair” under the FTC Act if “it causes or is likely to cause substantial injury” and “the injury is not outweighed by benefits to consumers or competition.”
In implementing this principle, it is important to keep in mind that a market failure could only arise if the costs attributable to any particular use of consumer data are not internalized by the parties to the relevant transaction. This requires showing either that a particular use of consumer data imposes harms on third parties (a plausible scenario in circumstances implicating risks to data security) or consumers are not aware of, or do not adequately assess or foresee, the costs they incur as a result of such use (a plausible scenario in circumstances implicating risks to consumer data). For the sake of brevity, I will focus on the latter scenario.
Many scholars have taken the view that consumers do not meaningfully read privacy notices or consider privacy risks, although the academic literature has also recognized efforts by private entities to develop notice methodologies that can improve consumers’ ability to do so. Even accepting this view, however, it does not necessarily follow (as the ANPR appears to assume) that a more thorough assessment of privacy risks would inevitably lead consumers to elect higher levels of data privacy even where that would degrade functionality or require paying a positive price for certain services. That is a tradeoff that will vary across consumers. It is therefore difficult to predict and easy to get wrong.
As the ANPR indirectly acknowledges in questions 26 and 40, interventions that bar certain uses of consumer data may therefore harm consumers by compelling the modification, positive pricing, or removal from the market of popular data-reliant services. For this reason, some scholars and commentators have favored the informed-consent approach that provides users with the option to bar or limit certain uses of their data. This approach minimizes error costs since it avoids overestimating consumer preferences for privacy. Unlike a flat prohibition of certain uses of consumer data, it also can reflect differences in those preferences across consumers. The ANPR appears to dismiss this concern, asking in question 75 whether certain practices should be made illegal “irrespective of whether consumers consent to them” (my emphasis added).
Addressing the still-uncertain body of evidence concerning the tradeoff between privacy protections on the one hand and data-reliant functionalities on the other (as well as the still-unresolved extent to which users can meaningfully make that tradeoff) lies outside the scope of this discussion. However, the critical observation is that any determination of market failure concerning any particular use of consumer data must identify the costs (and specifically, identify non-internalized costs) attributable to any such use and then offset those costs against the gains attributable to that use.
This balancing analysis is critical. As the commission recognized in a 2015 report, it is essential to strike a balance between safeguarding consumer privacy without suppressing the economic gains that arise from data-reliant services that can benefit consumers and vendors alike. This even-handed approach is largely absent from the ANPR—which, as noted above, focuses almost entirely on costs while largely overlooking the gains associated with the uses of consumer data in online markets. This suggests a one-sided approach to privacy regulation that is incompatible with the cost-benefit analysis that the commission recognizes it must follow in the rulemaking process.
Private-Ordering Approaches to Consumer-Data Regulation
Suppose that a rigorous and balanced cost-benefit analysis determines that a particular use of consumer data would likely yield social costs that exceed social gains. It would still remain to be determined whether and howa regulator should intervene to yield a net social gain. As regulators make this determination, it is critical that they consider the full range of possible mechanisms to address a particular market failure in the use of consumer data.
Consistent with this approach, the FTC Act specifically requires that the commission specify in an ANPR “possible regulatory alternatives under consideration,” a requirement that is replicated at each subsequent stage of the rulemaking process, as provided in the rules of practice. The range of alternatives should include the possibility of taking no action, if no feasible intervention can be identified that would likely yield a net gain.
In selecting among those alternatives, it is imperative that the commission consider the possibility of unnecessary or overly burdensome rules that could impede the efficient development and supply of data-reliant services, either degrading the quality or raising the price of those services. In the past, the commission has emphasized this concern, stating in 2011 that “[t]he FTC actively looks for means to reduce burdens while preserving the effectiveness of a rule.”
This consideration (which appears to be acknowledged in question 24 of the ANPR) is of special importance to privacy-related regulation, given that the estimated annual costs to the U.S. economy (as calculated by the Information Technology and Innovation Foundation) of compliance with the most extensive proposed forms of privacy-related regulations would exceed $100 billion dollars. Those costs would be especially burdensome for smaller entities, effectively raising entry barriers and reducing competition in online markets (a concern that appears to be acknowledged in question 27 of the ANPR).
Given the exceptional breadth of the rules that the ANPR appears to contemplate—cover an ambitious range of activities that would typically be the subject of a landmark piece of federal legislation, rather than administrative rulemaking—it is not clear that the commission has seriously considered this vital point of concern.
In the event that the FTC does move forward with any of these proposed rulemakings (which would be required to rest on a factually supported finding of market failure), it would confront a range of possible interventions in markets for consumer data. That range is typically viewed as being bounded, on the least-interventionist side, by notice and consent requirements to facilitate informed user choice, and on the most interventionist side, by prohibitions that specifically bar certain uses of consumer data.
This is well-traveled ground within the academic and policy literature and the relative advantages and disadvantages of each regulatory approach are well-known (and differ depending on the type of consumer data and other factors). Within the scope of this contribution, I wish to address an alternative regulatory approach that lies outside this conventional range of policy options.
Bottom-Up v. Top-Down Regulation
Any cost-benefit analysis concerning potential interventions to modify or bar a particular use of consumer data, or to mandate notice-and-consent requirements in connection with any such use, must contemplate not only government-implemented solutions but also market-implemented solutions, including hybrid mechanisms in which government action facilitates or complements market-implemented solutions.
This is not a merely theoretical proposal (and is referenced indirectly in questions 36, 51, and 87 of the ANPR). As I have discussed in previously published research, the U.S. economy has a long-established record of having adopted, largely without government intervention, collective solutions to the information asymmetries that can threaten the efficient operation of consumer goods and services markets.
Examples abound: Underwriters Laboratories (UL), which establishes product-safety standards in hundreds of markets; large accounting firms, which confirm compliance with Generally Accepted Accounting Principles (GAAP), which are in turn established and updated by the Financial Accounting Standards Board, a private entity subject to oversight by the Securities and Exchange Commission; and intermediaries in other markets, such as consumer credit, business credit, insurance carriers, bond issuers, and content ratings in the entertainment and gaming industries. Collectively, these markets encompass thousands of providers, hundreds of millions of customers, and billions of dollars in value.
A collective solution is often necessary to resolve information asymmetries efficiently because the benefits from establishing an industrywide standard of product or service quality, together with a trusted mechanism for showing compliance with that standard, generates gains that cannot be fully internalized by any single provider.
Jurisdictions outside the United States have tended to address this collective-action problem through the top-down imposition of standards by government mandate and enforcement by regulatory agencies, as illustrated by the jurisdictions referenced by the ANPR that have imposed restrictions on the use of consumer data through direct regulatory intervention. By contrast, the U.S. economy has tended to favor the bottom-up development of voluntary standards, accompanied by certification and audit services, all accomplished by a mix of industry groups and third-party intermediaries. In certain markets, this may be a preferred model to address the information asymmetries between vendors and customers that are the key sources of potential market failure in the use of consumer data.
Privately organized initiatives to set quality standards and monitor compliance benefit the market by supplying a reliable standard that reduces information asymmetries and transaction costs between consumers and vendors. This, in turn, yields economic gains in the form of increased output, since consumers have reduced uncertainty concerning product quality. These quality standards are generally implemented through certification marks (for example, the “UL” certification mark) or ranking mechanisms (for example, consumer-credit or business-credit scores), which induce adoption and compliance through the opportunity to accrue reputational goodwill that, in turn, translates into economic gains.
These market-implemented voluntary mechanisms are a far less costly means to reduce information asymmetries in consumer-goods markets than regulatory interventions, which require significant investments of public funds in rulemaking, detection, investigation, enforcement, and adjudication activities.
Hybrid Policy Approaches
Private-ordering solutions to collective-action failures in markets that suffer from information asymmetries can sometimes benefit from targeted regulatory action, resulting in a hybrid policy approach. In particular, regulators can sometimes play two supplemental functions in this context.
First, regulators can require that providers in certain markets comply with (or can provide a liability safe harbor for providers that comply with) the quality standards developed by private intermediaries that have developed track records of efficiently establishing those standards and reliably confirming compliance. This mechanism is anticipated by the ANPR, which asks in question 51 whether the commission should “require firms to certify that their commercial surveillance practices meet clear standards concerning collection, use, retention, transfer, or monetization of consumer data” and further asks whether those standards should be set by “the Commission, a third-party organization, or some other entity.”
Other regulatory agencies already follow this model. For example, federal and state regulatory agencies in the fields of health care and education rely on accreditation by designated private entities for purposes of assessing compliance with applicable licensing requirements.
Second, regulators can supervise and review the quality standards implemented, adjusted, and enforced by private intermediaries. This is illustrated by the example of securities markets, in which the major exchanges institute and enforce certain governance, disclosure, and reporting requirements for listed companies but are subject to regulatory oversight by the SEC, which must approve all exchange rules and amendments. Similarly, major accounting firms monitor compliance by public companies with GAAP but must register with, and are subject to oversight by, the Public Company Accounting Oversight Board (PCAOB), a nonprofit entity subject to SEC oversight.
These types of hybrid mechanisms shift to private intermediaries most of the costs involved in developing, updating, and enforcing quality standards (in this context, standards for the use of consumer data) and harness private intermediaries’ expertise, capacities, and incentives to execute these functions efficiently and rapidly, while using targeted forms of regulatory oversight as a complementary policy tool.
Conclusion
Certain uses of consumer data in digital markets may impose net social harms that can be mitigated through appropriately crafted regulation. Assuming, for the sake of argument, that the commission has the legal power to enact regulation to address such harms (again, a point as to which there is great doubt), any specific steps must be grounded in rigorous and balanced cost-benefit analysis.
As a matter of law and sound public policy, it is imperative that the commission meaningfully consider the full range of reliable evidence to identify any potential market failures in the use of consumer data and how to formulate rules to rectify or mitigate such failures at a net social gain. Given the extent to which business models in digital environments rely on the use of consumer data, and the substantial value those business models confer on consumers and businesses, the potential “error costs” of regulatory overreach are high. It is therefore critical to engage in a thorough balancing of costs and gains concerning any such use.
Privacy regulation is a complex and economically consequential policy area that demands careful diagnosis and targeted remedies grounded in analysis and evidence, rather than sweeping interventions accompanied by rhetoric and anecdote.
[This post is an entry in Truth on the Market’s continuing FTC UMC Rulemaking symposium.You can find other posts at thesymposium 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 their dissenting statements opposing ANPRM’s release, Commissioners Noah Phillips and Christine Wilson expertly lay bare the notice’s serious deficiencies. Phillips’ dissent stresses that the ANPRM illegitimately arrogates to the FTC legislative power that properly belongs to Congress:
[The [A]NPRM] recast[s] the Commission as a legislature, with virtually limitless rulemaking authority where personal data are concerned. It contemplates banning or regulating conduct the Commission has never once identified as unfair or deceptive. At the same time, the ANPR virtually ignores the privacy and security concerns that have animated our [FTC] enforcement regime for decades. … [As such, the ANPRM] 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. That’s not “democratizing” the FTC or using all “the tools in the FTC’s toolbox.” It’s a naked power grab.
Wilson’s complementary dissent critically notes that the 2021 changes to FTC rules of practice governing consumer-protection rulemaking decrease opportunities for public input and vest significant authority solely with the FTC chair. She also echoed Phillips’ overarching concern with FTC overreach (footnote citations omitted):
Many practices discussed in this ANPRM are presented as clearly deceptive or unfair despite the fact that they stretch far beyond practices with which we are familiar, given our extensive law enforcement experience. Indeed, the ANPRM wanders far afield of areas for which we have clear evidence of a widespread pattern of unfair or deceptive practices. … [R]egulatory and enforcement overreach increasingly has drawn sharp criticism from courts. Recent Supreme Court decisions indicate FTC rulemaking overreach likely will not fare well when subjected to judicial review.
Phillips and Wilson’s warnings are fully warranted. The ANPRM contemplates a possible Magnuson-Moss rulemaking pursuant to Section 18 of the FTC Act,[1] which authorizes the commission to promulgate rules dealing with “unfair or deceptive acts or practices.” The questions that the ANPRM highlights center primarily on concerns of unfairness.[2] Any unfairness-related rulemaking provisions eventually adopted by the commission will have to satisfy a strict statutory cost-benefit test that defines “unfair” acts, found in Section 5(n) of the FTC Act. As explained below, the FTC will be hard-pressed to justify addressing most of the ANPRM’s concerns in Section 5(n) cost-benefit terms.
Discussion
The requirements imposed by Section 5(n) cost-benefit analysis
Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:
The Commission shall have no authority … to declare unlawful an act or practice on the grounds that such an act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.
In other words, a practice may be condemned as unfair only if it causes or is likely to cause “(1) substantial injury to consumers (2) which is not reasonably avoidable by consumers themselves and (3) not outweighed by countervailing benefits to consumers or to competition.”
This is a demanding standard. (For scholarly analyses of the standard’s legal and economic implications authored by former top FTC officials, see here, here, and here.)
First, the FTC must demonstrate that a practice imposes a great deal of harm on consumers, which they could not readily have avoided. This requires detailed analysis of the actual effects of a particular practice, not mere theoretical musings about possible harms that may (or may not) flow from such practice. Actual effects analysis, of course, must be based on empiricism: consideration of hard facts.
Second, assuming that this formidable hurdle is overcome, the FTC must then acknowledge and weigh countervailing welfare benefits that might flow from such a practice. In addition to direct consumer-welfare benefits, other benefits include “benefits to competition.” Those may include business efficiencies that reduce a firm’s costs, because such efficiencies are a driver of vigorous competition and, thus, of long-term consumer welfare. As the Organisation for Economic Co-operation and Development has explained (see OECD Background Note on Efficiencies, 2012, at 14), dynamic and transactional business efficiencies are particularly important in driving welfare enhancement.
In sum, under Section 5(n), the FTC must show actual, fact-based, substantial harm to consumers that they could not have escaped, acting reasonably. The commission must also demonstrate that such harm is not outweighed by consumer and (procompetitive) business-efficiency benefits. What’s more, Section 5(n) makes clear that the FTC cannot “pull a rabbit out of a hat” and interject other “public policy” considerations as key factors in the rulemaking calculus (“[s]uch [other] public policy considerations may not serve as a primary basis for … [a] determination [of unfairness]”).
It ineluctably follows as a matter of law that a Section 18 FTC rulemaking sounding in unfairness must be based on hard empirical cost-benefit assessments, which require data grubbing and detailed evidence-based economic analysis. Mere anecdotal stories of theoretical harm to some consumers that is alleged to have resulted from a practice in certain instances will not suffice.
As such, if an unfairness-based FTC rulemaking fails to adhere to the cost-benefit framework of Section 5(n), it inevitably will be struck down by the courts as beyond the FTC’s statutory authority. This conclusion is buttressed by the tenor of the Supreme Court’s unanimous 2021 opinion in AMG Capital v. FTC, which rejected the FTC’s claim that its statutory injunctive authority included the ability to obtain monetary relief for harmed consumers (see my discussion of this case here).
The ANPRM and Section 5(n)
Regrettably, the tone of the questions posed in the ANPRM indicates a lack of consideration for the constraints imposed by Section 5(n). Accordingly, any future rulemaking that sought to establish “remedies” for many of the theorized abuses found in the ANPRM would stand very little chance of being upheld in litigation.
The Aug. 11 FTC press release cited previously addresses several broad topical sources of harms: harms to consumers; harms to children; regulations; automated systems; discrimination; consumer consent; notice, transparency, and disclosure; remedies; and obsolescence. These categories are chock full of questions that imply the FTC may consider restrictions on business conduct that go far beyond the scope of the commission’s authority under Section 5(n). (The questions are notably silent about the potential consumer benefits and procompetitive efficiencies that may arise from the business practices called here into question.)
A few of the many questions set forth under just four of these topical listings (harms to consumers, harms to children, regulations, and discrimination) are highlighted below, to provide a flavor of the statutory overreach that categorizes all aspects of the ANPRM. Many other examples could be cited. (Phillips’ dissenting statement provides a cogent and critical evaluation of ANPRM questions that embody such overreach.) Furthermore, although there is a short discussion of “costs and benefits” in the ANPRM press release, it is wholly inadequate to the task.
Under the category “harms to consumers,” the ANPRM press release focuses on harm from “lax data security or surveillance practices.” It asks whether FTC enforcement has “adequately addressed indirect pecuniary harms, including potential physical harms, psychological harms, reputational injuries, and unwanted intrusions.” The press release suggests that a rule might consider addressing harms to “different kinds of consumers (e.g., young people, workers, franchisees, small businesses, women, victims of stalking or domestic violence, racial minorities, the elderly) in different sectors (e.g., health, finance, employment) or in different segments or ‘stacks’ of the internet economy.”
These laundry lists invite, at best, anecdotal public responses alleging examples of perceived “harm” falling into the specified categories. Little or no light is likely to be shed on the measurement of such harm, nor on the potential beneficial effects to some consumers from the practices complained of (for example, better targeted ads benefiting certain consumers). As such, a sound Section 5(n) assessment would be infeasible.
Under “harms to children,” the press release suggests possibly extending the limitations of the FTC-administered Children’s Online Privacy Protection Act (COPPA) to older teenagers, thereby in effect rewriting COPPA and usurping the role of Congress (a clear statutory overreach). The press release also asks “[s]hould new rules set out clear limits on personalized advertising to children and teenagers irrespective of parental consent?” It is hard (if not impossible) to understand how this form of overreach, which would displace the supervisory rights of parents (thereby imposing impossible-to-measure harms on them), could be shoe-horned into a defensible Section 5(n) cost-benefit assessment.
Under “regulations,” the press release asks whether “new rules [should] require businesses to implement administrative, technical, and physical data security measures, including encryption techniques, to protect against risks to the security, confidentiality, or integrity of covered data?” Such new regulatory strictures (whose benefits to some consumers appear speculative) would interfere significantly in internal business processes. Specifically, they could substantially diminish the efficiency of business-security measures, diminish business incentives to innovate (for example, in encryption), and reduce dynamic competition among businesses.
Consumers also would be harmed by a related slowdown in innovation. Those costs undoubtedly would be high but hard, if not impossible, to measure. The FTC also asks whether a rule should limit “companies’ collection, use, and retention of consumer data.” This requirement, which would seemingly bypass consumers’ decisions to make their data available, would interfere with companies’ ability to use such data to improve business offerings and thereby enhance consumers’ experiences. Justifying new requirements such as these under Section 5(n) would be well-nigh impossible.
The category “discrimination” is especially problematic. In addressing “algorithmic discrimination,” the ANPRM press release asks whether the FTC should “consider new trade regulation rules that bar or somehow limit the deployment of any system that produces discrimination, irrespective of the data or processes on which those outcomes are based.” In addition, the press release asks “if the Commission [should] consider harms to other underserved groups that current law does not recognize as protected from discrimination (e.g., unhoused people or residents of rural communities)?”
The FTC cites no statutory warrant for the authority to combat such forms of “discrimination.” It is not a civil-rights agency. It clearly is not authorized to issue anti-discrimination rules dealing with “groups that current law does not recognize as protected from discrimination.” Any such rules, if issued, would be summarily struck down in no uncertain terms by the judiciary, even without regard to Section 5(n).
In addition, given the fact that “economic discrimination” often is efficient (and procompetitive) and may be beneficial to consumer welfare (see, for example, here), more limited economic anti-discrimination rules almost certainly would not pass muster under the Section 5(n) cost-benefit framework.
Finally, while the ANPRM press release does contain a very short section entitled “costs and benefits,” that section lacks any specific reference to the required Section 5(n) evaluation framework. Phillips’ dissent points out that the ANPRM:
…simply fail[s] to provide the detail necessary for commenters to prepare constructive responses” on cost-benefit analysis. He stresses that the broad nature of requests for commenters’ view on costs and benefits renders the inquiry “not conducive to stakeholders submitting data and analysis that can be compared and considered in the context of a specific rule. … Without specific questions about [the costs and benefits of] business practices and potential regulations, the Commission cannot hope for tailored responses providing a full picture of particular practices.
In other words, the ANPRM does not provide the guidance needed to prompt the sorts of responses that might assist the FTC in carrying out an adequate Section 5(n) cost-benefit analysis.
Conclusion
The FTC would face almost certain defeat in court if it promulgated a broad rule addressing many of the perceived unfairness-based “ills” alluded to in the ANPRM. Moreover, although its requirements would (I believe) not come into effect, such a rule nevertheless would impose major economic costs on society.
Prior to final judicial resolution of its status, the rule would disincentivize businesses from engaging in a variety of data-related practices that enhance business efficiency and benefit many consumers. Furthermore, the FTC resources devoted to developing and defending the rule would not be applied to alternative welfare-enhancing FTC activities—a substantial opportunity cost.
The FTC should take heed of these realities and opt not to carry out a rulemaking based on the ANPRM. It should instead devote its scarce consumer protection resources to prosecuting hard core consumer fraud and deception—and, perhaps, to launching empirical studies into the economic-welfare effects of data security and commercial surveillance practices. Such studies, if carried out, should focus on dispassionate economic analysis and avoid policy preconceptions. (For example, studies involving digital platforms should take note of the existing economic literature, such as a paper indicating that digital platforms have generated enormous consumer-welfare benefits not accounted for in gross domestic product.)
One can only hope that a majority of FTC commissioners will apply common sense and realize that far-flung rulemaking exercises lacking in statutory support are bad for the rule of law, bad for the commission’s reputation, bad for the economy, and bad for American consumers.
[1]The FTC states specifically that it “is issuing this ANPR[M] pursuant to Section 18 of the Federal Trade Commission Act”.
[2] Deceptive practices that might be addressed in a Section 18 trade regulation rule would be subject to the “FTC Policy Statement on Deception,” which states that “the Commission will find deception if there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment.” A court reviewing an FTC Section 18 rule focused on “deceptive acts or practices” undoubtedly would consult this Statement, although it is not clear, in light of recent jurisprudential trends, that the court would defer to the Statement’s analysis in rendering an opinion. In any event, questions of deception, which focus on acts or practices that mislead consumers, would in all likelihood have little relevance to the evaluation of any rule that might be promulgated in light of the ANPRM.
[On Monday, June 27, Concurrenceshosted a conference on the Rulemaking Authority of the Federal Trade Commission.This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]
[The post below was authored by Alden F. Abbott.]
I. Introduction
In over a century of existence, the U.S. Federal Trade Commission (FTC) has been a policy leader in developing American thinking about and in enforcing antitrust and consumer protection laws pursuant to several specific statutory mandates. It has also promulgated a substantial number of consumer protection rules, dealing with a wide variety of practices. It has almost never, however, enacted substantive rules seeking to regulate specified forms of business conduct that affect competition in the marketplace.
In 2021, however, the prospects for FTC competition rulemaking changed dramatically. A new Biden administration FTC chair, Lina Khan, publicly emphasized that the Commission should undertake “unfair methods of competition” (UMC) rulemakings. In December 2021, the FTC issued a “Statement of Regulatory Priorities” (SRP) stating that “the Commission in the coming year will consider developing both unfair-methods-of competition [UMC] rulemakings as well as rulemakings to define with specificity unfair or deceptive acts or practices [UDAPs].” The SRP also summarized the status of FTC rules and guides that are subject to periodic review.
With regard to UDAP rules, the SRP highlighted for consideration “rules that allow the agency to recover redress for consumers who have been defrauded and seek penalties for firms that engage in data abuses.” The SRP also explained that “the abuses stemming from surveillance-based business models are particularly alarming,” and thus the FTC would consider a possible rulemaking focused on “curbing lax security practices, limiting intrusive surveillance, and ensuring that algorithmic decision-making does not result in unlawful discrimination.”
With respect to UMC rules, the FTC painted with a broad brush, and referenced President Biden’s July 2021 Executive Order on Competition:
Over the coming year, the Commission will also explore whether rules defining certain “unfair methods of competition” prohibited by section 5 of the FTC Act would promote competition and provide greater clarity to the market. A recent Executive Order encouraged the Commission to consider competition rulemakings relating to non-compete clauses, surveillance, the right to repair, pay-for-delay pharmaceutical agreements, unfair competition in online marketplaces, occupational licensing, real-estate listing and brokerage, and industry-specific practices that substantially inhibit competition. The Commission will explore the benefits and costs of these and other competition rulemaking ideas.
Recently, the Commission published in the Federal Register a “Request for Public Comment Regarding Contract Terms that May Harm Fair Competition,” which included for reference two public petitions for competition rulemaking the Commission has received. One of those petitions was to curtail the use of non-compete clauses, and the other was to limit exclusionary contracting by dominant firms, but the Commission also solicited additional examples of unfair terms. Members of the public filed thousands of comments, which the Commission’s staff are carefully reviewing.
In short, significant FTC competition-related rulemaking initiatives are to be expected in 2022. The prospect that those initiatives will yield binding rules that survive legal scrutiny is, however, vanishingly small.
This commentary (which is an abridged chapter in a book on FTC rulemaking published by Concurrences) will explore legal doctrines that seriously constrain the FTC’s ability to enact competition rules. After summarizing the FTC’s authority to engage in rulemaking, it will turn to five major legal impediments to successful competition rulemaking that the FTC must confront. Each of these impediments creates substantial competition rulemaking legal risks for the Commission. Considered collectively, these impediments point to a very low likelihood of competition rulemaking success. Accordingly, the FTC should reconsider its bold competition rulemaking agenda and focus instead on devoting those rulemaking resources to other initiatives within its purview, including competition enforcement actions and policy studies. Such a reset of FTC priorities would likely yield a far better allocation of scarce governmental resources to initiatives that benefit consumers and avoid the imposition of unwarranted costs on private actors and the competitive process.
II. Discussion
1. FTC Rulemaking: An Overview
The Federal Trade Commission is an independent federal agency created pursuant to the Federal Trade Commission Act of 1914. The FTC’s mission is to protect consumers and promote competition (see generally here). It does this primarily through enforcement actions, directed at practices that violate section 5 of the FTC’s Act’s prohibitions on “unfair methods of competition” and “unfair or deceptive acts or practices.” While the FTC has also promulgated binding rules and non-binding enforcement guides throughout the course of its history, its principal means for advancing its mission has been enforcement, not regulation. As the FTC explains:
The basic statute enforced by the FTC, Section 5(a) of the FTC Act, empowers the agency to investigate and prevent unfair methods of competition, and unfair or deceptive acts or practices affecting commerce. This creates the Agency’s two primary missions: protecting competition and protecting consumers. The statute gives the FTC authority to seek relief for consumers, including injunctions and restitution, and in some instances to seek civil penalties from wrongdoers. The FTC has the ability to implement trade regulation rules defining with specificity acts or practices that are unfair or deceptive and the Commission can publish reports and make legislative recommendations to Congress about issues affecting the economy. The Commission enforces various antitrust laws under Section 5(a) of the FTC Act as well as the Clayton Act. The FTC monitors all its orders to ensure compliance.
FTC rules may be divided into three categories: section 6(g) rules, section 18 rules, and rules promulgated pursuant to statutes other than the FTC Act.
2. Section 6(g) Rules
Section 6(g) of the original Federal Trade Commission Act (“section 6(g)”) is a very short provision that empowers the FTC to “classify corporations” and also authorizes the Commission “to make rules and regulations for the purpose of carrying out the provisions of this subchapter [embodying the statutory authorities bestowed on the FTC].” Section 6(g) is a very tiny part of section 6 of the FTC Act, which delineates FTC powers to conduct investigations, issue reports, make criminal referrals to the Justice Department, cooperate with foreign enforcers, and expend funds for meetings with foreign officials and law enforcement groups. Section 6(g) primarily has been used by the Commission to enact procedural rules governing investigations and internal processes, not substantive rules dealing with business conduct.
Section 6(g) substantive rules today are subject to the informal rulemaking requirements of section 553 of the Administrative Procedure Act (APA), which apply to the vast majority of federal agency rulemaking proceedings. Informal rulemaking involves publication of a proposed rule, followed by public comment (at least 30 days), followed by publication of a final rule.
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 District of Columbia 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 nonsubstantive regulations regarding the FTC’s nonadjudicatory, investigative, and informative functions, spelled out elsewhere in section 6. Notably, however, the FTC has not enacted any 6(g) competition rules in the nearly fifty years since the National Petroleum Refiners case was decided.
3. Section 18 Rules
In 1975, 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 Federal Trade Commission Act (“section 18”). Section 18 imposes hearing-type requirements that are not found in APA informal rulemakings. As the FTC explains, once the Commission has promulgated a trade regulation rule, anyone who violates the rule “with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule” is liable for civil penalties for each violation.
Section 18 consumer protection rulemakings impose adjudicatory-type hearings and other specific requirements on the FTC, unlike more flexible section 6(g) APA informal rulemakings. However, as noted above, the FTC can obtain civil penalties for knowing violation of Magnuson-Moss rules, something it cannot do if 6(g) rules are violated. Since 1975, the FTC has promulgated only seven Magnuson-Moss rules, reflecting the “slow and cumbersome” nature of those rulemakings, according to some scholarly critics. The FTC has nevertheless issued a wide variety of substantive consumer protection rules in recent decades under various special statutes directed at specific consumer protection problems identified by Congress.
4. Non-FTC Act Rules
Over the years, Congress has passed a variety of statutes empowering the FTC to address particularized problems, through FTC enforcement and rulemaking initiatives, as appropriate. There are 82 such statutes currently in force, and only 16 deal solely with competition matters. FTC rules adopted pursuant to the many specialized consumer protection statutes (most of which were adopted in recent decades) largely obviated the need for and displaced section 6(g) consumer protection rulemaking initiatives of the 1960s.
The specialized competition laws (“special competition statutes”) involve such targeted substantive and procedural topics as, for example, fisheries conservation and management, litigation settlements between patented and generic drug makers, research and production joint ventures, outer continental shelf oil and gas leases, export trade associations, and international antitrust cooperation. Any FTC rules enacted under those laws inevitably are closely tied to and limited by the specific grant of congressional authority. Only one of the competition-related statutory grants, the Hart-Scott-Rodino Act of 1976 (HSR), involves rulemaking that is highly significant to antitrust enforcement across the board. Those rules, which were first promulgated in the 1970s and have been tweaked over time, directly carry out the statutory mandate and yield finely honed guidance to the private sector (similar to the detailed guidance that non-antitrust primarily regulatory agencies typically provide). In marked contrast to HSR, the section 6(g) reference to rulemaking is an extremely short and general provision that provides no framework to guide the development of possible substantive competition rules.
5. Legal Impediments to FTC Competition Rulemaking
In order to promulgate new FTC competition rules falling outside the ambit of specialized statutes, the FTC would have to rely primarily on section 6(g). Such rulemaking endeavors would face at least five legal doctrinal obstacles.
First, the “nondelegation doctrine” suggests that, under section 6(g), Congress did not confer on the FTC the specific statutory authority required to issue rules that address particular competitive practices.
Second, principles of statutory construction strongly indicate that the FTC’s general statutory provision dealing with rulemaking refers to procedural rules of organization, not substantive rules bearing on competition.
Third, even assuming that proposed competition rules survived these initial hurdles, principles of administrative law would raise the risk that competition rules would be struck down as “arbitrary and capricious.”
Fourth, there is a substantial possibility that courts would not defer to the FTC’s construction through rulemaking of its “unfair methods of competition” as authorizing the condemnation of specific competitive practices.
Fifth, any attempt by the FTC to rely on its more specific section 18 rulemaking powers to reach anticompetitive practices would be cabined by the limited statutory scope of those powers.
Considering these obstacles collectively, it is exceptionally unlikely that FTC competition rules will survive legal challenge.
A. Non-Delegation Doctrine
Although the non-delegation doctrine has been largely moribund over the last century, it may nevertheless be revived in an appropriate case, as five current Supreme Court Justices have spoken favorably of it in recent years. Moreover, although it seldom has been applied directly to strike down regulatory schemes, it has sometimes led the Supreme Court to narrowly construe the scope of a statutory delegation to strike down sweeping agency actions without invoking the doctrine. What’s more, the Supreme Court has held that a statutory delegation must be supported by an “intelligible principle” guiding its application. As such, The Court could well decide it appropriate to strike down far-reaching FTC rules that are based on broad and novel constructions of the vague yet expansive term “unfair methods of competition.”
B. Principles of Statutory Construction
The structure of the Federal Trade Commission 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 appears dated. Furthermore, the Supreme Court’s April 2021 decision in AMG Capital Management v. FTCembodies a reluctance to read general non-specific language as conferring broad substantive powers on the FTC. This interpretive approach is in line with other Supreme Court case law that rejects finding “elephants in mouseholes.”
The FTC would have to provide a sufficient basis to justify a determination that a particular practice barred by rule is inevitably anticompetitive. Doing so might prove difficult, because it would be in tension with the traditional “rule of reason” analysis of antitrust litigation, which evaluates particular practices on a fact-specific, case-by-case basis. If a reviewing court were to find that the FTC rulemaking record did not sufficiently take into account potential procompetitive manifestations of a condemned practice, for example, it might decide that the rule is arbitrary and strike it down. This risk would appear to be substantial, particularly given the lack of a preexisting competition rulemaking tradition that could help guide rulemaking review by the courts. Relatedly, a novel FTC construction of “unfair methods of competition” through rulemaking that was at odds with antitrust case law could raise due process of law objections.
D. Court Deference to FTC Interpretations of “Unfair Methods of Competition” Is Unlikely
The courts would be unlikely to accord “Chevron deference” to FTC Section 6(g) rules that construed the term “unfair methods of competition” to apply to specific competitive practices. The Supreme Court has avoided applying agency regulatory interpretations to various “major questions” of great “economic and political significance” (such as, for example, disputes involving the Affordable Care Act and the application of food and drug law to tobacco products)—either by determining from the start not to apply Chevron or by finding Chevron applies but electing nevertheless to reject agency statutory constructions. Given this background, the Supreme Court could readily determine that whether a broad array of hitherto unregulated commercial practices should be newly regulated on grounds of “unfairness” poses a “major question” for Congress that is beyond the scope of the FTC’s authority, rendering Chevron inapplicable. In addition, because “unfair methods of competition” rules could implicate the substantive content of antitrust law, such rules could interfere with Justice Department antitrust prosecutorial principles. This would solidify the conclusion that FTC competition rules implicate “major questions” of antitrust policy and interagency jurisdiction that should be left to Congress, and are outside the purview of the FTC’s interpretive authority.
E. Section 18 Rulemakings and Anticompetitive Practices
Given the substantial legal risks that confront section 6(g) rulemaking, the FTC might turn to section 18 (“unfair or deceptive acts or practices”) as a possible vehicle for the promulgation of new competition rules. The scope of possible application of section 18 to competition questions is, however, quite limited at best (see here). A “deceptive act or practice,” which the FTC defines as a “misrepresentation, omission, or other practice” that misleads consumers, is naturally directed to concerns about harm directly imposed on consumers by a business practice. It does not, however, fit naturally into concerns about business behavior that harms the process of competition. As such, a “deception” theory would not appear to be a good vehicle for a competition rule. Section 5(n) of the FTC Act, required that an “unfair act or practice” must impose measurable harm on consumers who acted reasonably. Second, such harm must be greater than any countervailing benefits to competition or consumers—in short, the conduct must on net be harmful, that is, it must fail a cost-benefit test. The FTC would have a very hard time jumping through the Section 18 evidentiary hoops to show that particular business practices met this test. In addition, courts might well conclude that Congress Section 18 was not designed by Congress to apply to “unfair method of competition.” Finally, two of the five current FTC Commissioners have criticized recent FTC revisions of the Commission’s rules of practice (see here) as undermining the goals of participation and transparency that Congress sought to advance when it enacted and amended Section 18. This could make judges even more reluctant to hold that Section 18 authorized novel competition rulemaking powers.
III. Conclusion
The current FTC leadership may be expected (at least initially) to proceed with competition rulemaking efforts, given Chair Khan’s strong support for this initiative. Rulemaking, of course, requires the gathering of evidence and the taking of testimony. Moreover, new competition rules imposing limitations on specified business practices or industry sectors would likely be appealed to U.S. courts of appeal. Eventually, one would expect the Supreme Court to step in to review the legal status of a particular competition rule and, most likely, the legality of FTC competition rulemaking itself. All of this would entail a substantial commitment of scarce public and private resources and take a considerable amount of time—the current FTC leadership likely would be long gone before a final legal resolution by the Supreme Court. Yet the end result would be in all likelihood a ruling that the FTC lacked substantive competition rulemaking authority. In short, the FTC rulemaking saga would almost surely entail pure waste, to the detriment of consumer welfare, producer welfare, and sound government.
RSS - Posts