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

Alden Abbott —  8 November 2022

Recently departed Federal Trade Commission (FTC) Commissioner Noah Phillips has been rightly praised as “a powerful voice during his four-year tenure at the FTC, advocating for rational antitrust enforcement and against populist antitrust that derails the fair yet disruptive process of competition.” The FTC will miss his trenchant analysis and collegiality, now that he has departed for the greener pastures of private practice.

A particularly noteworthy example of Phillips’ mastery of his craft is presented by his November 2018 dissent from the FTC’s majority opinion in the 1-800 Contacts case, which presented tricky questions about the proper scope of antitrust intervention in contracts designed to protect intellectual property rights. (For more on the opinion, see Geoffrey A. Manne, Hal Singer, and Joshua D. Wright’s December 2018 piece.)

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

The 1-800 Business Model and the FTC’s Proceedings

Before describing the 1-800 proceedings, Phillips’ dissent, and the judicial vindication of his position, we begin with a brief assessment of the welfare-enhancing innovative business model employed by 1-800 Contacts. The firm pioneered the online contact-lens sales business. It is an American entrepreneurial success story, which has bestowed great benefits on consumers through trademark-backed competition focusing on price and quality considerations. Phillips’ dissenting opinion explained:

Jonathan Coon started the business that would become 1-800 Contacts in 1992 from his college dormitory room with just $50 to his name, seeking to reduce prices, improve service, and provide a better customer experience for contact lens consumers. … Over the next 26 years he would succeed, building a company (and a brand) from essentially nothing to one of the largest contact lens retailers in the country, while introducing American consumers to mail-order contact lenses (and later ordering contacts online), driving down prices, and attracting competition from small and large companies alike. That growth required a combination of a massive investment in advertising and a constant quest to improve the customer experience. That is the type of conduct that antitrust and trademark law should, and do, encourage. …

As [the FTC administrative law judge] … found in the Initial Decision, “1-800 Contacts’ business objective from the company’s inception was to make the process of buying contact lenses simple and it tries to distinguish itself from other contact lens retailers by making it faster, easier, and more convenient to get contact lenses.” … This contrasts with other online contact lens retailers, which generally do not seek to distinguish themselves on the basis of customer experience, customer service, or simplicity. … 1-800 Contacts did not limit itself to competing on price because it found that many customers valued speed and convenience just as much as price. …

1-800 Contacts’ relentless investment in its brand and in improving its customer service are recognized. Many third parties—including J.D. Power and Associates, StellaService Elite, and Foresee—have recognized or given awards to 1-800 Contacts for its customer service. … But that has not stopped 1-800 Contacts from continuing to invest in improving its service to enhance the customer experience. …

The service and brand investments made by 1-800 Contacts have resulted in millions of consumers purchasing contact lenses from 1-800 Contacts over the phone and online. They are precisely the types of investments that trademark law exists to protect and encourage.

The 2nd Circuit summarized the actions by 1-800 Contacts (“Petitioner”) that prompted an FTC administrative complaint, then presented a brief history of the internal FTC proceedings:

In 2002, Petitioner began filing complaints and sending cease-and-desist letters to its competitors alleging trademark infringement related to its competitors’ online advertisements. Between 2004 and 2013, Petitioner entered into thirteen settlement agreements to resolve most of these disputes. Each of these agreements includes language that prohibits the parties from using each other’s trademarks, URLs, and variations of trademarks as search advertising keywords. The agreements also require the parties to employ negative keywords so that a search including one party’s trademarks will not trigger a display of the other party’s ads. The agreements do not prohibit parties from bidding on generic keywords such as “contacts” or “contact lenses.” Petitioner enforced the agreements when it perceived them to be breached.   

Apart from the settlement agreements, in 2013 Petitioner entered into a “sourcing and services agreement” with Luxottica, a company that sells and distributes contacts through its affiliates. That agreement also contains reciprocal online search advertising restrictions prohibiting the use of trademark keywords and requiring both parties to employ negative keywords.  

The FTC issued an administrative complaint against Petitioner in August 2016 alleging that the thirteen settlement agreements and the Luxottica agreement, … along with subsequent actions to enforce them, unreasonably restrain truthful, non-misleading advertising as well as price competition in search advertising auctions, all of which constitute a violation of Section 5 of the FTC Act, 15 U.S.C. § 45. The complaint alleges that the Challenged  Agreements prevented Petitioner’s competitors from disseminating ads that would have informed consumers that the same contact lenses were available at a cheaper price from other online retailers, thereby reducing competition and making it more difficult for consumers to compare online retail prices. The case was tried before an ALJ, who concluded that a violation had occurred.   

As an initial matter, the ALJ rejected Petitioner’s assertion that trademark settlement agreements are not subject to antitrust scrutiny in light of FTC v. Actavis, 570 U.S. 136 (2013). Applying the “rule of reason” and principles of Section 1 of the Sherman Act, 15 U.S.C. § 1, the ALJ determined that “[o]nline sales of contact lenses constitute a relevant product market.” … He found that the agreements constituted a “contract, combination, or  conspiracy” as required by the Sherman Act and held that the  advertising restrictions in the agreements harmed consumers by reducing the availability of information, in turn making it costlier for consumers to find and compare contact lens prices. …

Having found actual anticompetitive effects, as required under the rule of reason analysis, the ALJ rejected the procompetitive justifications for the agreements offered by Petitioner. He found that while trademark protection is procompetitive, it did not justify the advertising restrictions in the agreements and also that Petitioner failed to show that reduced litigation costs would benefit consumers. The ALJ issued an order that barred Petitioner from entering into an agreement with any marketer or seller of contact lenses to limit participation in search advertising auctions or to prohibit or limit search advertising.

1-800 appealed the ALJ’s order to the Commission. In a split decision, a majority of the Commission agreed with the ALJ that the agreements violated Section 5 of the FTC Act. The majority, however, analyzed the settlement agreements differently from the ALJ. The majority classified the agreements as “inherently suspect” and alternatively found “direct evidence” of anticompetitive effects on consumers and search engines. The majority then analyzed the procompetitive justifications Petitioner offered for the agreements and rejected arguments that the benefits of protecting trademarks and reducing litigation costs outweighed any potential harm to consumers. Finally, the majority identified what it believed to be less anticompetitive alternatives to the advertising restrictions in the agreements. One Commissioner dissented, reasoning both that the majority should not have applied the “inherently suspect” framework and that it failed to give appropriate consideration to Petitioner’s proffered procompetitive justifications. This timely appeal followed.

Commissioner Phillips’ Dissent

Phillips meticulously made the case that 1-800 Contacts’ behavior raised no antitrust concerns.

First, he began by stressing that the settlements in question resolved legitimate trademark-infringement claims. The settlements also were limited in scope. They did not prevent any of the parties from engaging in any form of non-infringing advertising (online or offline), they specifically permitted non-infringing uses like comparative advertising and parodies, and they placed no restrictions on the content that any of the settling parties could include in their ads. In short, the settlements “sought to balance 1-800 Contacts’ legitimate interests in protecting its trademarks with competitors’ (and consumers’) interests in truthful advertising.

Second, he explained in detail why the FTC majority opinion failed to show that the trademark settlements were “inherently suspect.” He noted that the “[s]ettlements do not approximate conduct that the Commission or courts have previously found to be inherently suspect, much less illegal.” FTC complaint counsel had not demonstrated any output effects—the settlements permitted price and quality advertising, and did not affect third-party sellers. The Actavis Supreme Court refused to apply the inherently suspect framework “even though the alleged conduct at issue [reverse payments] was far more harmful to competition than anything at issue here, as well-established economic evidence demonstrated.”

Moreover, the majority opinion’s reliance on the FTC’s Polygram decision was misplaced, because the defendants in that case fixed prices and banned advertising (“[t]here is no price fixing here [n]or is there an advertising ban”). Other cases cited by the majority involving advertising restrictions similarly were inapposite, because they involved far greater restrictions on advertising and did not implicate intellectual property. Furthermore, “[t]he economic studies cited by the majority d[id] not examine paid search advertising, … much less how restraints upon it interact with the trademark policies at issue here.”

Third, he discussed at length why the majority should not have pursued a truncated rule-of-reason analysis. In short:

Applicable precedent makes clear that the Trademark Settlements should be analyzed under the traditional rule of reason. And the cases on which the majority rely fail to provide support for truncating that analysis by applying the “inherently suspect” framework. As noted, those cases do not involve trademarks, or intellectual property of any kind. That is relevant—indeed, decisive—because trademarks often limit advertising in one way or another, and the logic of the majority’s analysis would support a rule that stigmatizes conduct protecting those rights, which is clearly procompetitive, as presumptively unlawful.

Fourth, in addition to the legal infirmities, Phillips skillfully exposed the serious policy shortcomings of the majority’s “inherently suspect” approach:

Treating the Trademark Settlements as “inherently suspect” yields an unclear rule that regardless of interpretation, will, I fear, create uncertainty, dilute trademark rights, and dampen inter-brand competition. The majority couch their holding as a limited one dealing with restraints on the opportunity to make price comparisons, but, by adopting an analytical framework without accounting for the intellectual property at issue, they produce one of the following rules: either all advertising restrictions are inherently suspect, regardless whether they protect intellectual property rights, or the level of scrutiny applied to a particular restraint will depend on the strength of the trademark holder’s underlying infringement claim.

In his policy assessment, Phillips added that the policy favoring litigation settlements (due to the fact that, as a general matter, they promote efficiency) supports application of the traditional rule of reason.

Fifth, turning to the traditional rule of reason, Phillips explicated FTC complaint counsel’s failure to meet its burden of proof (case citations omitted):

If the Trademark Settlements are not “inherently suspect”, which they are not, Complaint Counsel can meet their initial burden of proof under the rule of reason in one of two ways: “an indirect showing based on a demonstration of defendant’s market power” or “direct evidence of ‘actual, sustained adverse effects on competition’” … The majority take only the direct approach; they do not attempt an indirect showing of market power. … To meet the initial burden of direct evidence, a plaintiff must show adverse effects on competition that are actual, sustained, and significant or substantial. … Complaint Counsel have not met that burden with its showing on direct effects.

In dealing with burden-of-proof issues, Phillips demonstrated that, in the context of a trademark-settlement agreement, a restriction on advertising is, by itself, insufficient to show direct effects. Phillips conceded that, “[w]hile restrictions on advertising are not themselves enough, the majority are correct that a showing of actual, sustained, and substantial or significant price effects would suffice.” But Phillips emphasized that the majority failed to show that the trademark settlements were responsible for “the fact that 1-800 Contacts’ prices were higher than some of its competitors’ prices.” Indeed, the record was “clear that that price differential predated the Trademark Settlements.” Furthermore, FTC complaint counsel “put forward no evidence that the price gap increased as a result of the Trademark Settlements.” What’s more, the FTC majority “did not adduce legally sufficient proof” that “1-800 Contacts maintained supracompetitive prices. … [T]he majority d[id] not even attempt to show that 1-800 Contacts’ price cost-margin was abnormally high—either before or after the Trademark Settlements.”

Phillips next focused on the substantial procompetitive justifications for 1-800’s conduct. (This was legally unnecessary, because the initial burden under the inherently suspect framework had not been met, direct effects had not been shown, and there had been no effort to show indirect effects.) These included settlement-related litigation-cost savings and enhanced trademark protections. Phillips stressed “the tremendous amount of investment 1-800 Contacts ha[d] made in building its brand, lowering the price of contact lenses, and offering customers superior service.” 

After skillfully refuting the FTC majority’s novel separate theory that the settlements had anticompetitive effects on firms owning search engines (such as Google or Bing), Phillips skewered the FTC majority’s claim that the trademark settlements could have been narrower:

The searches that the Trademark Settlements prohibit[ed] [we[re] precisely those searches that implicate[d] 1-800 Contacts’ trademarks. They [we]re also the searches through which users [we]re most likely attempting to reach the 1-800 Contacts website (i.e., searches for 1-800 Contacts’ trademark). …

The settling parties included a negative keyword provision in response to Google’s explicit encouragement for 1-800 Contacts to resolve its trademark disputes with competitors by having them implement 1-800 Contacts’ trademarked terms as negative keywords. … They did so because, without negative keywords, a settling party’s advertisements could appear in response to searches for the counterparty’s trademarked terms.

Almost all of the Trademark Settlements balanced these restrictions with a provision explicitly permitting a settling party to use the counterparty’s trademarks in the non-internet context, including comparative advertising. …

As a result, …  the Trademark Settlements were appropriately tailored to achieve their goal of preventing trademark infringement while balancing the need to permit non-infringing advertising.

Turning to the Luxottica servicing agreement, Phillips explained that the majority opinion mistakenly characterized it as just another inherently suspect settlement. Instead, it was an efficient sourcing and servicing agreement. Under the agreement, 1-800 Contacts shipped contacts for sale to Luxottica brick-and-mortar chain stores, and Luxottica also provided other services. Luxottica benefited by outsourcing its entire contact-lens business—including negotiating with contact-lens suppliers—to 1-800 Contacts. The majority failed to analyze the various procompetitive benefits stemming from this arrangement, which fit squarely within the FTC-U.S. Justice Department (DOJ) Competitor Collaboration Guidelines. In particular, for example, “[a]s a direct result of its decision to outsource much of its contact business to 1-800 Contacts, Luxottica customers could receive lower prices and better services (e.g., faster delivery).”

Phillips closed his dissent by highlighting the ineffectiveness of the FTC majority’s order, which “state[d] that the only agreements that 1-800 Contacts c[ould] enter [we]re those that, in effect, that t[old] the counterparty that they c[ould] [not] violate the trademark laws.” This unhelpful language “w[ould] only lead to more litigation to determine what conduct actually violated the trademark laws in the context of paid search advertising based on trademarked keywords. Because the Order only allow[ed] agreements that d[id] not actually resolve the dispute in trademark infringement litigation, it w[ould] reduce the incentive to settle, which, in turn, w[ould] lead to either less trademark enforcement or more costly litigation”.

Phillips concluding paragraph offered sound general advice about the limits of antitrust and the need to avoid a harmful lack of clarity in enforcement:

The Commission’s mandate is to enforce the antitrust laws, but we cannot do so in a vacuum. We need to consider competing policies, including federal trademark policy, when analyzing allegedly anticompetitive conduct. And we should recognize that unclear rules may do more harm both to that policy and to competition than the alleged conduct here. In the case of the Trademark Settlements, precedent offers a better way: the Commission should analyze such agreements under the full rule of reason, giving appropriate weight to the trademarks at issue and the value they protect. Such a rule will decrease uncertainty in the market, encourage brand investment, and increase competition.

The 2nd Circuit Rejects the FTC Majority’s Position

The 2nd Circuit rejected the FTC majority opinion and vacated commission’s order. First, it rejected the FTC’s reliance on a “quick look” analysis, stating:

Courts do not have sufficient experience with this type of conduct to permit the abbreviated analysis of the Challenged [trademark settlement] Agreements undertaken by the Commission. … When, as here, not only are there cognizable procompetitive justifications but also the type of restraint has not been widely condemned in our “judicial experience,” … more is required. … The Challenged Agreements, therefore, are not so obviously anticompetitive to consumers that someone with only a basic understanding of economics would immediately recognize them to be so. … We are bound, then, to apply the rule of reason.

Turning to full rule-of-reason analysis, the court began by assessing anticompetitive effects. It rejected the FTC’s argument that it had established direct evidence of such effects in the form of increased prices. It emphasized that the government could not show an actual anticompetitive change in prices after the restraint was implemented, “because it did not conduct an empirical analysis of the Challenged Agreements effect on the price of contact lenses in the online market for contacts.” Specifically, because the FTC’s evidence was merely “theoretical and anecdotal,” the evidence was not “direct.” The court also concluded that it need not decide whether an FTC theory of anticompetitive harm due to “disrupted information flow” (due to a reduction in the quantity of advertisements) was viable, because 1-800 Contacts had shown a procompetitive justification.

The court rejected the FTC’s finding that 1-800 Contact’s citation of two procompetitive effects—reduced litigation costs and the protection of trademark rights—had no basis in fact. Citing the 2nd Circuit’s Clorox decision, the court emphasized that “[t]rademarks are by their nature non-exclusionary, and agreements to protect trademark interests are ‘common and favored, under the law.’” The FTC’s doubts about the merits of the trademark-infringement claims were irrelevant, because, consistent with Clorox, “trademark agreements that ‘only marginally advance[] trademark policies’ can be procompetitive.” And while trademark agreements that were “auxiliary to an underlying illegal agreement between competitors” would not pass legal muster, there was “a lack of evidence here that the Challenged Agreements [we]re the ‘product of anything other than hard-nosed trademark negotiations.’”

Because 1-800 Contacts had “carried its burden of identifying a procompetitive justification, the government [had to] … show that a less-restrictive alternative exist[ed] that achieve[d] the same legitimate competitive benefits.” In that regard, the FTC claimed “that the parties to the Challenged Agreements could have agreed to require clear disclosure in each search advertisement of the identity of the rival seller rather than prohibit all advertising on trademarked issues.”

But, citing Clorox, the court opined that “it is usually unwise for courts to second-guess” trademark agreements between competitors, because “the parties’ determination of the proper scope of needed trademark protection is entitled to substantial weight.” In this matter, the FTC “failed to consider the practical reasons for the parties entering into the Challenged Agreements. … The Commission did not consider, for example, how the parties might enforce such a requirement moving forward or give any weight to how onerous such enforcement efforts would be for private parties.” In short, “[w]hile trademark agreements limit competitors from competing as effectively as they otherwise might, … forcing companies to be less aggressive in enforcing their trademarks is antithetical to the procompetitive goals of trademark policy.”

In sum, the court concluded:

In this case, where the restrictions that arise are born of typical trademark settlement agreements, we cannot overlook the Procompetitive Agreements’ procompetitive goal of promoting trademark policy. In light of the strong procompetitive justification of protecting Petitioner’s trademarks, we conclude the Challenged Agreements “merely regulate[] and perhaps thereby promote[] competition.”

Conclusion

While strong intellectual-property protection is key to robust competition, the different types of IP advance competitive interests in different manners. Patents, for example, provide a right to exclude access to well-defined inventions, thereby creating incentives to invent and facilitating contracts that spread patent-based innovations throughout the economy. Trademarks protect brand names and logos, thereby serving as specific indicators of origin and creating incentives to invest in improving the quality of the product or service covered by a trademark. As such, strong trademarks spur competition over quality and reduce uncertainty about the particular attributes of competing goods and services. In short, trademarks tend to promote dynamic competition and benefit consumers.

Properly applied, antitrust law seeks to advance consumer welfare and strengthen the competitive process. In that regard, the policy goals of antitrust and intellectual property are in harmony, and antitrust should be enforced in a manner that complements, and does not undermine, IP policy. Thus, when faced with a competitive restraint covering IP rights, antitrust enforcers should evaluate it carefully. They should be mindful of the procompetitive goals it may serve and avoid focusing solely on theories of competitive harm that ignore IP interests.

The FTC majority in 1-800 Contacts missed this fundamental point. They gave relatively short shrift to the procompetitive aspects of trademark protection and, at the same time, mischaracterized minor restrictions on advertising as akin to significant restraints that chill the provision of price information and product comparisons.

There was no showing that the 1-800 restrictions had stifled price competition or undermined in any manner consumers’ ability to compare contact-lens brands and prices online. In reality, the settlement agreements under scrutiny were rather carefully crafted to protect 1-800 Contacts’ goodwill, reflected in its substantial investments in quality enhancement and the promotion of relatively low-cost online sales. In the absence of the settlements, its online rivals would have been able to free ride on 1-800’s brand investments, diminishing that innovative firm’s incentive to continue to invest in trademark-related product enhancements. The long-term effect would have been to diminish, not enhance, dynamic competition.

More generally, had it prevailed, the FTC majority’s blinkered analytical approach in 1-800 Contacts could have chilled vigorous, welfare-enhancing competition in many other markets where trademarks play an important role. Fortunately, the majority’s holding did not stand for long.

Phillips’ brilliant dissent, which carefully integrated trademark-policy concerns into the application of antitrust principles—in tandem with the subsequent 2nd Circuit decision that properly acknowledged the need to weigh such concerns in antitrust analysis—provide a template for trademark-antitrust assessments that may be looked to by future courts and enforcers. Let us hope that current Biden administration FTC and DOJ Antitrust Division enforcers also take heed. 

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

Daniel Gilman —  4 November 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Administrative Law, Antitrust & Competition, Antitrust Division, Biweekly FTC Roundup, Cartels, Federal Trade Commission, Justice Department, Section 5, Tying , , , , , , , , , , ,
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The Bitter Fruits of Federal Antitrust ‘Reform’ Legislation

Alden Abbott —  25 July 2022

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

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

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

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

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

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

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

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

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

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

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

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

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

In Antitrust & Competition, Antitrust’s Uncertain Future, Cartels, Exclusive Dealing, Monopolization, Platforms, Price Discrimination, Supreme Court, Symposia, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , , , ,
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DOJ’s Threatened Reign of Error: Proposed Criminal-Monopolization Prosecutions

Alden Abbott —  17 June 2022

The Biden administration’s antitrust reign of error continues apace. The U.S. Justice Department’s (DOJ) Antitrust Division has indicated in recent months that criminal prosecutions may be forthcoming under Section 2 of the Sherman Antitrust Act, but refuses to provide any guidance regarding enforcement criteria.

Earlier this month, Deputy Assistant Attorney General Richard Powers stated that “there’s ample case law out there to help inform those who have concerns or questions” regarding Section 2 criminal enforcement, conveniently ignoring the fact that criminal Section 2 cases have not been brought in almost half a century. Needless to say, those ancient Section 2 cases (which are relatively few in number) antedate the modern era of economic reasoning in antitrust analysis. What’s more, unlike Section 1 price-fixing and market-division precedents, they yield no clear rule as to what constitutes criminal unilateral behavior. Thus, DOJ’s suggestion that old cases be consulted for guidance is disingenuous at best. 

It follows that DOJ criminal-monopolization prosecutions would be sheer folly. They would spawn substantial confusion and uncertainty and disincentivize dynamic economic growth.

Aggressive unilateral business conduct is a key driver of the competitive process. It brings about “creative destruction” that transforms markets, generates innovation, and thereby drives economic growth. As such, one wants to be particularly careful before condemning such conduct on grounds that it is anticompetitive. Accordingly, error costs here are particularly high and damaging to economic prosperity.

Moreover, error costs in assessing unilateral conduct are more likely than in assessing joint conduct, because it is very hard to distinguish between procompetitive and anticompetitive single-firm conduct, as DOJ’s 2008 Report on Single Firm Conduct Under Section 2 explains (citations omitted):

Courts and commentators have long recognized the difficulty of determining what means of acquiring and maintaining monopoly power should be prohibited as improper. Although many different kinds of conduct have been found to violate section 2, “[d]efining the contours of this element … has been one of the most vexing questions in antitrust law.” As Judge Easterbrook observes, “Aggressive, competitive conduct by any firm, even one with market power, is beneficial to consumers. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it. The big problem lies in this: competitive and exclusionary conduct look alike.”

The problem is not simply one that demands drawing fine lines separating different categories of conduct; often the same conduct can both generate efficiencies and exclude competitors. Judicial experience and advances in economic thinking have demonstrated the potential procompetitive benefits of a wide variety of practices that were once viewed with suspicion when engaged in by firms with substantial market power. Exclusive dealing, for example, may be used to encourage beneficial investment by the parties while also making it more difficult for competitors to distribute their products.

If DOJ does choose to bring a Section 2 criminal case soon, would it target one of the major digital platforms? Notably, a U.S. House Judiciary Committee letter recently called on DOJ to launch a criminal investigation of Amazon (see here). Also, current Federal Trade Commission (FTC) Chair Lina Khan launched her academic career with an article focusing on Amazon’s “predatory pricing” and attacking the consumer welfare standard (see here).

Khan’s “analysis” has been totally discredited. As a trenchant scholarly article by Timothy Muris and Jonathan Nuechterlein explains:

[DOJ’s criminal Section 2 prosecution of A&P, begun in 1944,] bear[s] an eerie resemblance to attacks today on leading online innovators. Increasingly integrated and efficient retailers—first A&P, then “big box” brick-and-mortar stores, and now online retailers—have challenged traditional retail models by offering consumers lower prices and greater convenience. For decades, critics across the political spectrum have reacted to such disruption by urging Congress, the courts, and the enforcement agencies to stop these American success stories by revising antitrust doctrine to protect small businesses rather than the interests of consumers. Using antitrust law to punish pro-competitive behavior makes no more sense today than it did when the government attacked A&P for cutting consumers too good a deal on groceries. 

Before bringing criminal Section 2 charges against Amazon, or any other “dominant” firm, DOJ leaders should read and absorb the sobering Muris and Nuechterlein assessment. 

Finally, not only would DOJ Section 2 criminal prosecutions represent bad public policy—they would also undermine the rule of law. In a very thoughtful 2017 speech, then-Acting Assistant Attorney General for Antitrust Andrew Finch succinctly summarized the importance of the rule of law in antitrust enforcement:

[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.

Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.

The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.

Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.

Bringing criminal monopolization cases now, after a half-century of inaction, would be antithetical to the stability and continuity that underlie the rule of law. What’s worse, the failure to provide prosecutorial guidance would be squarely at odds with concerns of notice and reliance that inform the rule of law. As such, a DOJ decision to target firms for Section 2 criminal charges would offend the rule of law (and, sadly, follow the FTC ‘s recent example of flouting the rule of law, see here and here).

In sum, the case against criminal Section 2 prosecutions is overwhelming. At a time when DOJ is facing difficulties winning “slam dunk” criminal Section 1  prosecutions targeting facially anticompetitive joint conduct (see here, here, and here), the notion that it would criminally pursue unilateral conduct that may generate substantial efficiencies is ludicrous. Hopefully, DOJ leadership will come to its senses and drop any and all plans to bring criminal Section 2 cases.

In Amazon, Antitrust & Competition, Error Costs, Federal Trade Commission, Justice Department, Monopolization, Platforms, Price Discrimination, Truth on the Market , , , , , , , , , , , , , , , ,
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