Archives For Sherman Antitrust Act

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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Pushing the Limits? A Primer on FTC Competition Rulemaking

Maureen K. Ohlhausen & James F. Rill —  7 July 2022

[On Monday, June 27, Concurrences hosted 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 former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former Assistant U.S. Attorney General James F. Rill.]

Since its founding in 1914, the Federal Trade Commission (FTC) has held a unique and multifaceted role in the U.S. administrative state and the economy. It possesses powerful investigative and information-gathering powers, including through compulsory processes; a multi-layered administrative-adjudication process to prosecute “unfair methods of competition (UMC)” (and later, “unfair and deceptive acts and practices (UDAP),” as well); and an important role in educating and informing the business community and the public. What the FTC cannot be, however, is a legislature with broad authority to expand, contract, or alter the laws that Congress has tasked it with enforcing.

Recent proposals for aggressive UMC rulemaking, predicated on Section 6(g) of the FTC Act, would have the effect of claiming just this sort of quasi-legislative power for the commission based on a thin statutory reed authorizing “rules and regulations for the purpose of carrying out the provisions of” that act. This usurpation of power would distract the agency from its core mission of case-by-case expert application of the FTC Act through administrative adjudication. It would also be inconsistent with the explicit grants of rulemaking authority that Congress has given the FTC and run afoul of the congressional and constitutional “guard rails” that cabin the commission’s authority.

FTC’s Unique Role as an Administrative Adjudicator

The FTC’s Part III adjudication authority is central to its mission of preserving fair competition in the U.S. economy. The FTC has enjoyed considerable success in recent years with its administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall (not simply a separate category of UMC law) by creating citable precedent in key areas. However, as a result of its July 1, 2021, open meeting and President Joe Biden’s “Promoting Competition in the American Economy” executive order, the FTC appears to be headed for another misadventure in response to calls to claim authority for broad, legislative-style “unfair methods of competition” rulemaking out of Section 6(g) of the FTC Act. The commission recently took a significant and misguided step toward this goal by rescinding—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, divorcing (at least in the commission majority’s view) Section 5 from prevailing antitrust-law principles and leaving the business community without any current guidance as to what the commission considers “unfair.”

FTC’s Rulemaking Authority Was Meant to Complement its Case-by-Case Adjudicatory Authority, Not Supplant It

As described below, broad rulemaking of this sort would likely encounter stiff resistance in the courts, due to its tenuous statutory basis and the myriad constitutional and institutional problems it creates. But even aside from the issue of legality, such a move would distract the FTC from its fundamental function as an expert case-by-case adjudicator of competition issues. It would be far too tempting for the commission to simply regulate its way to the desired outcome, bypassing all neutral arbiters along the way. And by seeking to promulgate such rules through abbreviated notice-and-comment rulemaking, the FTC would be claiming extremely broad substantive authority to directly regulate business conduct across the economy with relatively few of the procedural protections that Congress felt necessary for the FTC’s trade-regulation rules in the consumer-protection context. This approach risks not only a diversion of scarce agency resources from meaningful adjudication opportunities, but also potentially a loss of public legitimacy for the commission should it try to exempt itself from these important rulemaking safeguards.

FTC Lacks Authority to Promulgate Legislative-Style Competition Rules

The FTC has historically been hesitant to exercise UMC rulemaking authority under Section 6(g) of the FTC Act, which simply states that FTC shall have power “[f]rom time to time to classify corporations and … to make rules and regulations for the purpose of carrying out the provisions” of the FTC Act. Current proponents of UMC rulemaking argue for a broad interpretation of this clause, allowing for legally binding rulemaking on any issue subject to the FTC’s jurisdiction. But the FTC’s past reticence to exercise such sweeping powers is likely due to the existence of significant and unresolved questions of the FTC’s UMC rulemaking authority from both a statutory and constitutional perspective.

Absence of Statutory Authority

The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners Association v. FTC. In that case, the FTC succeeded in classifying the failure to post octane ratings on gasoline pumps as “an unfair method of competition.” The U.S. Court of Appeals for the D.C. Circuit found that Section 6(g) did confer this rulemaking authority. But Congress responded two years later with the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975, which created a new rulemaking scheme that applied exclusively to the FTC’s consumer-protection rules. This act expressly excluded rulemaking on unfair methods of competition from its authority. The statute’s provision that UMC rulemaking is unaffected by the legislation manifests strong congressional design that such rules would be governed not by Magnuson-Moss, but by the FTC Act itself. The reference in Magnuson-Moss to the statute not affecting “any authority” of the FTC to engage in UMC rulemaking—as opposed to “the authority”— reflects Congress’ agnostic view on whether the FTC possessed any such authority. It simply means that whatever authority exists for UMC rulemaking, the Magnuson-Moss provisions do not affect it, and Congress left the question open for the courts to resolve.

Proponents of UMC rulemaking argue that Magnuson-Moss left the FTC’s competition-rulemaking authority intact and entitled to Chevron deference. But, as has been pointed out by many commentators over the decades, that would be highly incongruous, given that National Petroleum Refiners dealt with both UMC and UDAP authority under Section 6(g), yet Congress’ reaction was to provide specific UDAP rulemaking authority and expressly take no position on UMC rulemaking. As further evidenced by the fact that the FTC has never attempted to promulgate a UMC rule in the years following enactment of Magnuson-Moss, the act is best read as declining to endorse the FTC’s UMC rulemaking authority. Instead, it leaves the question open for future consideration by the courts.

Turning to the terms of the FTC Act, modern statutory interpretation takes a far different approach than the court in National Petroleum Refiners, which discounted the significance of Section 5’s enumeration of adjudication as the means for restraining UMC and UDAP, reasoning that Section 5(b) did not use limiting language and that Section 6(g) provides a source of substantive rulemaking authority. This approach is in clear tension with the elephants-in-mouseholes doctrine developed by the Supreme Court in recent years. The FTC’s recent claim of broad substantive UMC rulemaking authority based on the absence of limiting language and a vague, ancillary provision authorizing rulemaking alongside the ability to “classify corporations” stands in conflict with the Court’s admonition in Whitman v. American Trucking Association. The Court in AMG Capital Management, LLC v. FTC recently applied similar principles in the context of the FTC’s authority under the FTC Act. Here,the Court emphasized “the historical importance of administrative proceedings” and declined to give the FTC a shortcut to desirable outcomes in federal court. Similarly, granting broad UMC-rulemaking authority to the FTC would permit it to circumvent the FTC Act’s defining feature of case-by-case adjudications. Applying the principles enunciated in Whitman and AMG, Section 5 is best read as specifying the sole means of UMC enforcement (adjudication), and Section 6(g) is best understood as permitting the FTC to specify how it will carry out its adjudicative, investigative, and informative functions. Thus, Section 6(g) grants ministerial, not legislative, rulemaking authority.

Notably, this reading of the FTC Act would accord with how the FTC viewed its authority until 1962, a fact that the D.C. Circuit found insignificant, but that later doctrine would weigh heavily. Courts should consider an agency’s “past approach” toward its interpretation of a statute, and an agency’s longstanding view that it lacks the authority to take a certain action is a “rather telling” clue that the agency’s newfound claim to such authority is incorrect. Conversely, even widespread judicial acceptance of an interpretation of an agency’s authority does not necessarily mean the construction of the statute is correct. In AMG, the Court gave little weight to the FTC’s argument that appellate courts “have, until recently, consistently accepted its interpretation.” It also rejected the FTC’s argument that “Congress has in effect twice ratified that interpretation in subsequent amendments to the Act.” Because the amendments did not address the scope of Section 13(b), they did not convince the Court in AMG that Congress had acquiesced in the lower courts’ interpretation.

The court in National Petroleum Refiners also lauded the benefits of rulemaking authority and emphasized that the ability to promulgate rules would allow the FTC to carry out the purpose of the act. But the Supreme Court has emphasized that “however sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits UMC-rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.

In sum, even Chevron requires the agency to rely on a “permissible construction” of the statute, and it is doubtful that the current Supreme Court would see a broad assertion of substantive antitrust rulemaking as “permissible” under the vague language of Section 6(g).

Constitutional Vulnerabilities

The shaky foundation supporting the FTC’s claimed authority for UMC rulemaking is belied by both the potential breadth of such rules and the lack of clear guidance in Section 6(g) itself. The presence of either of these factors increases the likelihood that any rule promulgated under Section 6 runs afoul of the constitutional nondelegation doctrine.

The nondelegation doctrine requires Congress to provide “an intelligible principle” to assist the agency to which it has delegated legislative discretion. Although long considered moribund, the doctrine was recently addressed by the U.S. Supreme Court in Gundy v. United States, which underscored the current relevance of limitations on Congress’ ability to transfer unfettered legislative-like powers to federal agencies. Although the statute in that case was ruled permissible by a plurality of justices, most of the Court’s current members have expressed concerns that the Court has long been too quick to reject nondelegation arguments, arguing for stricter controls in this area. In a concurrence, Justice Samuel Alito lamented that the Court has “uniformly rejected nondelegation arguments and has upheld provisions that authorized agencies to adopt important rules pursuant to extraordinarily capacious standards,” while Justices Neil Gorsuch and Clarence Thomas and Chief Justice John Roberts dissented, decrying the “unbounded policy choices” Congress had bestowed, stating that it “is delegation running riot” to “hand off to the nation’s chief prosecutor the power to write his own criminal code.”

The Gundy dissent cited to A.L.A. Schechter Poultry Corp. v. United States, where the Supreme Court struck down Congress’ delegation of authority based on language very similar to Section 5 of the FTC Act. Schechter Poultry examined whether the authority that Congress granted to the president under the National Industrial Recovery Act (NIRA) violated the nondelegation clause. The offending NIRA provision gave the president authority to approve “codes of fair competition,” which comes uncomfortably close to the FTC Act’s “unfair methods of competition” grant of authority. Notably, Schechter Poultry expressly differentiated NIRA from the FTC Act based on distinctions that do not apply in the rulemaking context. Specifically, the Court stated that, despite the similar delegation of authority, unlike NIRA, actions under the FTC Act are subject to an adjudicative process. The Court observed that the commission serves as “a quasi judicial body” and assesses what constitutes unfair methods of competition “in particular instances, upon evidence, in light of particular competitive conditions.” That essential distinction disappears in the case of rulemaking, where the commission acts in a quasi-legislative role and promulgates rules of broad application.

It appears that the nondelegation doctrine may be poised for a revival and may play a significant role in the Supreme Court’s evaluation of expansive attempts by the Biden administration to exercise legislative-type authority without explicit congressional authorization and guidance. This would create a challenging backdrop for the FTC to attempt aggressive new UMC rulemaking.

Antitrust Rulemaking by FTC Is Likely to Lead to Inefficient Outcomes and Institutional Conflicts

Aside from the doubts raised by these significant statutory and constitutional issues as to the legality of competition rulemaking by the FTC, there are also several policy and institutional factors counseling against legislative-style antitrust rulemaking.

Legislative Rulemaking on Competition Issues Runs Contrary to the Purpose of Antitrust Law

The core of U.S. antitrust law is based on broadly drafted statutes that, at least for violations outside the criminal-conspiracy context, leave determinations of likely anticompetitive effects, procompetitive justifications, and ultimate liability up to factfinders charged with highly detailed, case-specific determinations. Although no factfinder is infallible, this requirement for highly fact-bound analysis helps to ensure that each case’s outcome has a high likelihood of preserving or increasing consumer welfare.

Legislative rulemaking would replace this quintessential fact-based process with one-size-fits-all bright-line rules. Competition rules would function like per se prohibitions, but based on notice-and-comment procedures, rather than the broad and longstanding legal and economic consensus usually required for per se condemnation under the Sherman Act. Past experience with similar regulatory regimes should give reason for pause here: the Interstate Commerce Commission, for example, failed to efficiently regulate the railroad industry before being abolished with bipartisan consensus in 1996, costing consumers, by some estimates, as much as several billion (in today’s) dollars annually in lost competitive benefits. As FTC Commissioner Christine Wilson observes, regulatory rules “frequently stifle innovation, raise prices, and lower output and quality without producing concomitant health, safety, and other benefits for consumers.” By sacrificing the precision of case-by-case adjudication, rulemaking advocates are also losing one of the best tools we have to account for “market dynamics, new sources of competition, and consumer preferences.”

Potential for Institutional Conflict with DOJ

In addition to these substantive concerns, UMC rulemaking by the FTC would also create institutional conflicts between the FTC and DOJ and lead to divergence between the legal standards applicable to the FTC Act, on the one hand, and the Sherman and Clayton acts, on the other. At present, courts have interpreted the FTC Act to be generally coextensive with the prohibitions on unlawful mergers and anticompetitive conduct under the Sherman and Clayton acts, with the limited exception of invitations to collude. But because the FTC alone has the authority to enforce the FTC Act, and rulemaking by the FTC would be limited to interpretations of that act (and could not directly affect or repeal caselaw interpreting the Sherman and Clayton acts), it would create two separate standards of liability. Given that the FTC and DOJ historically have divided enforcement between the agencies based on the industry at issue, this could result in different rules of conduct, depending on the industry involved. Types of conduct that have the potential for anticompetitive effects under certain circumstances but generally pass a rule-of-reason analysis could nonetheless be banned outright if the industry is subject to FTC oversight. Dissonance between the two federal enforcement agencies would be even more difficult for companies not falling firmly within either agency’s purview; those entities would lack certainty as to which guidelines to follow: rule-of-reason precedent or FTC rules.

Conclusion

Following its rebuke at the Supreme Court in the AMG Capital Management case, now is the time for the FTC to focus on its core, case-by-case administrative mission, taking full advantage of its unique adjudicative expertise. Broad unfair methods of competition rulemaking, however, would be an aggressive step in the wrong direction—away from FTC’s core mission and toward a no-man’s-land far afield from the FTC’s governing statutes.

In Administrative Law, Antitrust & Competition, Antitrust Division, Federal Trade Commission, FTC UMC Rulemaking, Justice Department, Regulation, Symposia, Truth on the Market , , , , , , ,
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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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Application of the Proper ‘Outer Boundary’ of Antitrust Liability for Alleged Refusals to Deal in New York v Facebook

George L. Paul, Jaclyn Phillips, & Andrew Black —  15 April 2022

The following post was authored by counsel with White & Case LLP, who represented the International Center for Law & Economics (ICLE) in an amicus brief filed on behalf of itself and 12 distinguished law & economics scholars with the U.S. Court of Appeals for the D.C. Circuit in support of affirming U.S. District Court Judge James Boasberg’s dismissal of various States Attorneys General’s antitrust case brought against Facebook (now, Meta Platforms).

Introduction

The States brought an antitrust complaint against Facebook alleging that various conduct violated Section 2 of the Sherman Act. The ICLE brief addresses the States’ allegations that Facebook refused to provide access to an input, a set of application-programming interfaces that developers use in order to access Facebook’s network of social-media users (Facebook’s Platform), in order to prevent those third parties from using that access to export Facebook data to competitors or to compete directly with Facebook.

Judge Boasberg dismissed the States’ case without leave to amend, relying on recent Supreme Court precedent, including Trinko and Linkline, on refusals to deal. The Supreme Court strongly disfavors forced sharing, as shown by its decisions that recognize very few exceptions to the ability of firms to deal with whom they choose. Most notably, Aspen Skiing Co. v. Aspen Highlands Skiing is a 1985 decision recognizing an exception to the general rule that firms may deal with whom they want that was limited, though not expressly overturned, by Trinko in 2004. The States appealed to the D.C. Circuit on several grounds, including by relying on Aspen Skiing, and advocating for a broader view of refusals to deal than dictated by current jurisprudence. 

ICLE’s brief addresses whether the District Court was correct to dismiss the States’ allegations that Facebook’s Platform policies violated Section 2 of the Sherman Act in light of the voluminous body of precedent and scholarship concerning refusals to deal. ICLE’s brief argues that Judge Boasberg’s opinion is consistent with economic and legal principles, allowing firms to choose with whom they deal. Furthermore, the States’ allegations did not make out a claim under Aspen Skiing, which sets forth extremely narrow circumstances that may constitute an improper refusal to deal.  Finally, ICLE takes issue with the States’ attempt to create an amorphous legal standard for refusals to deal or otherwise shoehorn their allegations into a “conditional dealing” framework.

Economic Actors Should Be Able to Choose Their Business Partners

ICLE’s basic premise is that firms in a free-market system should be able to choose their business partners. Forcing firms to enter into certain business relationships can have the effect of stifling innovation, because the firm getting the benefit of the forced dealing then lacks incentive to create their own inputs. On the other side of the forced dealing, the owner would have reduced incentives to continue to innovate, invest, or create intellectual property. Forced dealing, therefore, has an adverse effect on the fundamental nature of competition. As the Supreme Court stated in Trinko, this compelled sharing creates “tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” 

Courts Are Ill-Equipped to Regulate the Kind of Forced Sharing Advocated by the States

ICLE also notes the inherent difficulties of a court’s assessing forced access and the substantial risk of error that could create harm to competition. This risk, ICLE notes, is not merely theoretical and would require the court to scrutinize intricate details of a dynamic industry and determine which decisions are lawful or not. Take the facts of New York v. Facebook: more than 10 million apps and websites had access to Platform during the relevant period and the States took issue with only seven instances where Facebook had allegedly improperly prevented access to Platform. Assessing whether conduct would create efficiency in one circumstance versus another is challenging at best and always risky. As Frank Easterbook wrote: “Anyone who thinks that judges would be good at detecting the few situations in which cooperation would do more good than harm has not studied the history of antitrust.”

Even assuming a court has rightly identified a potentially anticompetitive refusal to deal, it would then be put to the task of remedying it. But imposing a remedy, and in effect assuming the role of a regulator, is similarly complicated. This is particularly true in dynamic, quickly evolving industries, such as social media. This concern is highlighted by the broad injunction the States seek in this case: to “enjoin[] and restrain [Facebook] from continuing to engage in any anticompetitive conduct and from adopting in the future any practice, plan, program, or device having a similar purpose or effect to the anticompetitive actions set forth above.”  Such a remedy would impose conditions on Facebook’s dealings with competitors for years to come—regardless of how the industry evolves.

Courts Should Not Expand Refusal-to-Deal Analysis Beyond the Narrow Circumstances of Aspen Skiing

In light of the principles above, the Supreme Court, as stated in Trinko, “ha[s] been very cautious in recognizing [refusal-to-deal] exceptions, because of the uncertain virtue of forced sharing and the difficulty of identifying and remedying anticompetitive conduct by a single firm.” Various scholars (e.g., Carlton, Meese, Lopatka, Epstein) have analyzed Aspen Skiing consistently with Trinko as, at most, “at or near the boundary of § 2 liability.”

So is a refusal-to-deal claim ever viable?  ICLE argues that refusal-to-deal claims have been rare (rightly so) and, at most, should only go forward under the delineated circumstances in Aspen Skiing. ICLE sets forth the 10th U.S. Circuit’s framework in Novell, which makes clear that “the monopolist’s conduct must be irrational but for its anticompetitive effect.”

  • First, “there must be a preexisting voluntary and presumably profitable course of dealing between the monopolist and rival.”
  • Second, “the monopolist’s discontinuation of the preexisting course of dealing must suggest a willingness to forsake short-term profits to achieve an anti-competitive end.”
  • Finally, even if these two factors are present, the court recognized that “firms routinely sacrifice short-term profits for lots of legitimate reasons that enhance consumer welfare.”

The States seek to broaden Aspen Skiing in order to sinisterize Facebook’s Platform policies, but the facts do not fit. The States do not plead an about-face with respect to Facebook’s Platform policies; the States do not allege that Facebook’s changes to its policies were irrational (particularly in light of the dynamic industry in which Facebook operates); and the States do not allege that Facebook engaged in less efficient behavior with the goal of hurting rivals. Indeed, Facebook changed its policies to retain users—which is essential to its business model (and therefore, rational).

The States try to evade these requirements by arguing for a looser refusal-to-deal standard (and by trying to shoehorn the conduct as “conditional dealing”)—but as ICLE explains, allowing such a claim to go forward would fly in the face of the economic and policy goals upheld by the current jurisprudence. 

Conclusion

The District Court was correct to dismiss the States’ allegations concerning Facebook’s Platform policies. Allowing a claim against Facebook to progress under the circumstances alleged in the States’ complaint would violate the principle that a firm, even one that is a monopolist, should not be held liable for refusing to deal with a certain business partner. The District Court’s decision is in line with key economic principles concerning refusals to deal and consistent with the Supreme Court’s decision in Aspen Skiing. Aspen Skiing is properly read to severely limit the circumstances giving rise to a refusal-to-deal claim, or else risk adverse effects such as reduced incentive to innovate.  

Amici Scholars Signing on to the Brief

(The ICLE brief presents the views of the individual signers listed below. Institutions are listed for identification purposes only.)

Henry Butler
Henry G. Manne Chair in Law and Economics and Executive Director of the Law & Economics Center, Scalia Law School		Daniel Lyons
Professor of Law, Boston College Law School
Richard A. Epstein
Laurence A. Tisch Professor of Law at NY School of Law, the Peter and Kirsten Bedford Senior Lecturer at the Hoover Institution, and the James Parker Hall Distinguished Service Professor Emeritus		Geoffrey A. Manne
President and Founder, International Center for Law & Economics, Distinguished Fellow Northwestern University Center on Law, Business & Economics
Thomas Hazlett
H.H. Macaulay Endowed Professor of Economics and Director of the Information Economy Project, Clemson University		Alan J. Meese
Ball Professor of Law, Co-Director, Center for the Study of Law and Markets, William & Mary Law School
Justin (Gus) Hurwitz
Professor of Law and Menard Director of the Nebraska Governance and Technology Center, University of Nebraska College of Law		Paul H. Rubin
Samuel Candler Dobbs Professor of Economics Emeritus, Emory University
Jonathan Klick
Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Carey School of Law; Erasmus Chair of Empirical Legal Studies, Erasmus University Rotterdam		Michael Sykuta
Associate Professor of Economics and Executive Director of Financial Research Institute, University of Missouri Division of Applied Social Sciences
Thomas A. Lambert
Wall Chair in Corporate Law and Governance, University of Missouri Law School		John Yun
Associate Professor of Law and Deputy Executive Director of the Global Antitrust Institute, Scalia Law School
In Antitrust & Competition, Barriers to Entry, Exclusionary Conduct, Facebook, Platforms, Truth on the Market, Vertical Restraints , , , , , , , ,
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The Supreme Court Misses the Big Consumer Welfare Picture in NCAA v. Alston

Alden Abbott —  21 June 2021

In its June 21 opinion in NCAA v. Alston, a unanimous U.S. Supreme Court affirmed the 9th U.S. Circuit Court of Appeals and thereby upheld a district court injunction finding unlawful certain National Collegiate Athletic Association (NCAA) rules limiting the education-related benefits schools may make available to student athletes. The decision will come as no surprise to antitrust lawyers who heard the oral argument; the NCAA was portrayed as a monopsony cartel whose rules undermined competition by restricting compensation paid to athletes.

Alas, however, Alston demonstrates that seemingly “good facts” (including an apparently Scrooge-like defendant) can make very bad law. While superficially appearing to be a relatively straightforward application of Sherman Act rule of reason principles, the decision fails to come to grips with the relationship of the restraints before it to the successful provision of the NCAA’s joint venture product – amateur intercollegiate sports. What’s worse, Associate Justice Brett Kavanaugh’s concurring opinion further muddies the court’s murky jurisprudential waters by signaling his view that the NCAA’s remaining compensation rules are anticompetitive and could be struck down in an appropriate case (“it is not clear how the NCAA can defend its remaining compensation rules”). Prospective plaintiffs may be expected to take the hint.

The Court’s Flawed Analysis

I previously commented on this then-pending case a few months ago:

In sum, the claim that antitrust may properly be applied to combat the alleged “exploitation” of college athletes by NCAA compensation regulations does not stand up to scrutiny. The NCAA’s rules that define the scope of amateurism may be imperfect, but there is no reason to think that empowering federal judges to second guess and reformulate NCAA athletic compensation rules would yield a more socially beneficial (let alone optimal) outcome. (Believing that the federal judiciary can optimally reengineer core NCAA amateurism rules is a prime example of the Nirvana fallacy at work.)  Furthermore, a Supreme Court decision affirming the 9th Circuit could do broad mischief by undermining case law that has accorded joint venturers substantial latitude to design the core features of their collective enterprise without judicial second-guessing.

Unfortunately, my concerns about a Supreme Court affirmance of the 9th Circuit were realized. Associate Justice Neil Gorsuch’s opinion for the court in Alston manifests a blinkered approach to the NCAA “monopsony” joint venture. To be sure, it cites and briefly discusses key Supreme Court joint venture holdings, including 2006’s Texaco v. Dagher. Nonetheless, it gives short shrift to the efficiency-based considerations that counsel presumptive deference to joint venture design rules that are key to the nature of a joint venture’s product.  

As a legal matter, the court felt obliged to defer to key district court findings not contested by the NCAA—including that the NCAA enjoys “monopsony power” in the student athlete labor market, and that the NCAA’s restrictions in fact decrease student athlete compensation “below the competitive level.”

However, even conceding these points, the court could have, but did not, take note of and assess the role of the restrictions under review in helping engender the enormous consumer benefits the NCAA confers upon consumers of its collegiate sports product. There is good reason to view those restrictions as an effort by the NCAA to address a negative externality that could diminish the attractiveness of the NCAA’s product for ultimate consumers, a result that would in turn reduce inter-brand competition.

As the amicus brief by antitrust economists (“Antitrust Economists Brief”) pointed out:

[T]he NCAA’s consistent and growing popularity reflects a product—”amateur sports” played by students and identified with the academic tradition—that continues to generate enormous consumer interest. Moreover, it appears without dispute that the NCAA, while in control of the design of its own athletic products, has preserved their integrity as amateur sports, notwithstanding the commercial success of some of them, particularly Division I basketball and Football Subdivision football. . . . Over many years, the NCAA has continually adjusted its eligibility and participation rules to prevent colleges from pursuing their own interests—which certainly can involve “pay to play”—in ways that would conflict with the procompetitive aims of the collaboration. In this sense, the NCAA’s amateurism rules are a classic example of addressing negative externalities and free riding that often are inherent or arise in the collaboration context.

The use of contractual restrictions (vertical restraints) to counteract free riding and other negative externalities generated in manufacturer-distributor interactions are well-recognized by antitrust courts. Although the restraints at issue in NCAA (and many other joint venture situations) are horizontal in nature, not vertical, they may be just as important as other nonstandard contracts in aligning the incentives of member institutions to best satisfy ultimate consumers. Satisfying consumers, in turn, enhances inter-brand competition between the NCAA’s product and other rival forms of entertainment, including professional sports offerings.

Alan Meese made a similar point in a recent paper (discussing a possible analytical framework for the court’s then-imminent Alston analysis):

[U]nchecked bidding for the services of student athletes could result in a market failure and suboptimal product quality, proof that the restraint reduces student athlete compensation below what an unbridled market would produce should not itself establish a prima facie case. Such evidence would instead be equally consistent with a conclusion that the restraint eliminates this market failure and restores compensation to optimal levels.

The court’s failure to address the externality justification was compounded by its handling of the rule of reason. First, in rejecting a truncated rule of reason with an initial presumption that the NCAA’s restraints involving student compensation are procompetitive, the court accepted that the NCAA’s monopsony power showed that its restraints “can (and in fact do) harm competition.” This assertion ignored the efficiency justification discussed above. As the Antitrust Economists’ Brief emphasized: 

[A]cting more like regulators, the lower courts treated the NCAA’s basic product design as inherently anticompetitive [so did the Supreme Court], pushing forward with a full rule of reason that sent the parties into a morass of inquiries that were not (and were never intended to be) structured to scrutinize basic product design decisions and their hypothetical alternatives. Because that inquiry was unrestrained and untethered to any input or output restraint, the application of the rule of reason in this case necessarily devolved into a quasi-regulatory inquiry, which antitrust law eschews.

Having decided that a “full” rule of reason analysis is appropriate, the Supreme Court, in effect, imposed a “least restrictive means” test on the restrictions under review, while purporting not to do so. (“We agree with the NCAA’s premise that antitrust law does not require businesses to use anything like the least restrictive means of achieving legitimate business purposes.”) The court concluded that “it was only after finding the NCAA’s restraints ‘patently and inexplicably stricter than is necessary’ to achieve the procompetitive benefits the league had demonstrated that the district court proceeded to declare a violation of the Sherman Act.” Effectively, however, this statement deferred to the lower court’s second-guessing of the means employed by the NCAA to preserve consumer demand, which the lower court did without any empirical basis.

The Supreme Court also approved the district court’s rejection of the NCAA’s view of what amateurism requires. It stressed the district court’s findings that “the NCAA’s rules and restrictions on compensation have shifted markedly over time” (seemingly a reasonable reaction to changes in market conditions) and that the NCAA developed the restrictions at issue without any reference to “considerations of consumer demand” (a de facto regulatory mandate directed at the NCAA). The Supreme Court inexplicably dubbed these lower court actions “a straightforward application of the rule of reason.” These actions seem more like blind deference to rather arbitrary judicial second-guessing of the expert party with the greatest interest in satisfying consumer demand.

The Supreme Court ended its misbegotten commentary on “less restrictive alternatives” by first claiming that it agreed that “antitrust courts must give wide berth to business judgments before finding liability.” The court asserted that the district court honored this and other principles of judicial humility because it enjoined restraints on education-related benefits “only after finding that relaxing these restrictions would not blur the distinction between college and professional sports and thus impair demand – and only finding that this course represented a significantly (not marginally) less restrictive means of achieving the same procompetitive benefits as the NCAA’s current rules.” This lower court finding once again was not based on an empirical analysis of procompetitive benefits under different sets of rules. It was little more than the personal opinion of a judge, who lacked the NCAA’s knowledge of relevant markets and expertise. That the Supreme Court accepted it as an exercise in restrained judicial analysis is well nigh inexplicable.

The Antitrust Economists’ Brief, unlike the Supreme Court, enunciated the correct approach to judicial rewriting of core NCAA joint venture rules:

The institutions that are members of the NCAA want to offer a particular type of athletic product—an amateur athletic product that they believe is consonant with their primary academic missions. By doing so, as th[e] [Supreme] Court has [previously] recognized [in its 1984 NCAA v. Board of Regents decision], they create a differentiated offering that widens consumer choice and enhances opportunities for student-athletes. NCAA, 468 U.S. at 102. These same institutions have drawn lines that they believe balance their desire to foster intercollegiate athletic competition with their overarching academic missions. Both the district court and the Ninth Circuit have now said that they may not do so, unless they draw those lines differently. Yet neither the district court nor the Ninth Circuit determined that the lines drawn reduce the output of intercollegiate athletics or ascertained whether their judicially-created lines would expand that output. That is not the function of antitrust courts, but of legislatures.                                                                                                   

Other Harms the Court Failed to Consider                    

Finally, the court failed to consider other harms that stem from a presumptive suspicion of NCAA restrictions on athletic compensation in general. The elimination of compensation rules should favor large well-funded athletic programs over others, potentially undermining “competitive balance” among schools. (Think of an NCAA March Madness tournament where “Cinderella stories” are eliminated, as virtually all the talented players have been snapped up by big name schools.) It could also, through the reallocation of income to “big name big sports” athletes who command a bidding premium, potentially reduce funding support for “minor college sports” that provide opportunities to a wide variety of student-athletes. This would disadvantage those athletes, undermine the future of “minor” sports, and quite possibly contribute to consumer disillusionment and unhappiness (think of the millions of parents of “minor sports” athletes).

What’s more, the existing rules allow many promising but non-superstar athletes to develop their skills over time, enhancing their ability to eventually compete at the professional level. (This may even be the case for some superstars, who may obtain greater long-term financial rewards by refining their talents and showcasing their skills for a year or two in college.) In addition, the current rules climate allows many student athletes who do not turn professional to develop personal connections that serve them well in their professional and personal lives, including connections derived from the “brand” of their university. (Think of wealthy and well-connected alumni who are ardent fans of their colleges’ athletic programs.) In a world without NCAA amateurism rules, the value of these experiences and connections could wither, to the detriment of athletes and consumers alike. (Consistent with my conclusion, economists Richard McKenzie and Dwight Lee have argued against the proposition that “college athletes are materially ‘underpaid’ and are ‘exploited’”.)   

This “parade of horribles” might appear unlikely in the short term. Nevertheless, in the course of time, the inability of the NCAA to control the attributes of its product, due to a changed legal climate, make it all too real. This is especially the case in light of Justice Kavanaugh’s strong warning that other NCAA compensation restrictions are likely indefensible. (As he bluntly put it, venerable college sports “traditions alone cannot justify the NCAA’s decision to build a massive money-raising enterprise on the backs of student athletes who are not fairly compensated. . . . The NCAA is not above the law.”)

Conclusion

The Supreme Court’s misguided Alston decision fails to weigh the powerful efficiency justifications for the NCAA’s amateurism rules. This holding virtually invites other lower courts to ignore efficiencies and to second guess decisions that go to the heart of the NCAA’s joint venture product offering. The end result is likely to reduce consumer welfare and, quite possibly, the welfare of many student athletes as well. One would hope that Congress, if it chooses to address NCAA rules, will keep these dangers well in mind. A statutory change not directed solely at the NCAA, creating a rebuttable presumption of legality for restraints that go to the heart of a lawful joint venture, may merit serious consideration.   

In Antitrust & Competition, Intellectual Property, Market Definition, Monopolization, Patent, Supreme Court, Truth on the Market, Vertical Restraints , , , , , , , , , , , , , , ,
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Section 5 of the FTC Act and monopolization cases: A brief primer

Geoffrey Manne —  26 November 2012

Co-authored with Berin Szoka

In the past two weeks, Members of Congress from both parties have penned scathing letters to the FTC warning of the consequences (both to consumers and the agency itself) if the Commission sues Google not under traditional antitrust law, but instead by alleging unfair competition under Section 5 of the FTC Act. The FTC is rumored to be considering such a suit, and FTC Chairman Jon Leibowitz and Republican Commissioner Tom Rosch have expressed a desire to litigate such a so-called “pure” Section 5 antitrust case — one not adjoining a cause of action under the Sherman Act. Unfortunately for the Commissioners, no appellate court has upheld such an action since the 1960s.

This brewing standoff is reminiscent of a similar contest between Congress and the FTC over the Commission’s aggressive use of Section 5 in consumer protection cases in the 1970s. As Howard Beales recounts, the FTC took an expansive view of its authority and failed to produce guidelines or limiting principles to guide its growing enforcement against “unfair” practices — just as today it offers no limiting principles or guidelines for antitrust enforcement under the Act. Only under heavy pressure from Congress, including a brief shutdown of the agency (and significant public criticism for becoming the “National Nanny“), did the agency finally produce a Policy Statement on Unfairness — which Congress eventually codified by statute.

Given the attention being paid to the FTC’s antitrust authority under Section 5, we thought it would be helpful to offer a brief primer on the topic, highlighting why we share the skepticism expressed by the letter-writing members of Congress (along with many other critics).

The topic has come up, of course, in the context of the FTC’s case against Google. The scuttlebut is that the Commission believes it may not be able to bring and win a traditional, Section 2 antitrust action, and so may resort to Section 5 to make its case — or simply force a settlement, as the FTC did against Intel in late 2010. While it may be Google’s head on the block today, it could be anyone’s tomorrow. This isn’t remotely just about Google; it’s about broader concerns over the Commission’s use of Section 5 to prosecute monopolization cases without being subject to the rigorous economic standards of traditional antitrust law.

Background on Section 5

Section 5 has two “prongs.” The first, reflected in its prohibition of “unfair acts or deceptive acts or practices” (UDAP) is meant (and has previously been used—until recently, as explained) as a consumer protection statute. The other, prohibiting “unfair methods of competition” (UMC) has, indeed, been interpreted to have relevance to competition cases.

Most commonly (and commonly-accepted), the UMC language has been viewed to authorize the agency to bring cases that fill the gaps between clearly anticompetitive conduct and the language of the Sherman Act. Principally, this has been invoked in “invitation to collude” cases, which raise the spectre of price-fixing but nevertheless do not meet the literal prohibition against “agreement in restraint of trade” under Section 1 of the Sherman Act.

Over strenuous objections from dissenting Commissioners (and only in consent decrees; not before courts), the FTC has more recently sought to expand the reach of the UDAP language beyond the consumer protection realm to address antitrust concerns that would likely be non-starters under the Sherman Act.

In N-Data, the Commission brought and settled a case invoking both the UDAP and UMC prongs of Section 5 to reach (alleged) conduct that amounted to breach of a licensing agreement without the requisite (Sherman Act) Section 2 claim of exclusionary conduct (which would have required that the FTC show that N-Data’s conducted had the effect of excluding its rivals without efficiency or welfare-enhancing properties). Although the FTC’s claims fall outside the ambit of Section 2, the Commission’s invocation of Section 5’s UDAP language was so broad that it could — quite improperly — be employed to encompass traditional Section 2 claims nonetheless, but without the rigor Section 2 requires (as the vigorous dissents by Commissioners Kovacic and Majoras discuss). As Commissioner Kovacic wrote in his dissent:

[T]he framework that the [FTC’s] Analysis presents for analyzing the challenged conduct as an unfair act or practice would appear to encompass all behavior that could be called a UMC or a violation of the Sherman or Clayton Acts. The Commission’s discussion of the UAP [sic] liability standard accepts the view that all business enterprises – including large companies – fall within the class of consumers whose injury is a worthy subject of unfairness scrutiny. If UAP coverage extends to the full range of business-to-business transactions, it would seem that the three-factor test prescribed for UAP analysis would capture all actionable conduct within the UMC prohibition and the proscriptions of the Sherman and Clayton Acts. Well-conceived antitrust cases (or UMC cases) typically address instances of substantial actual or likely harm to consumers. The FTC ordinarily would not prosecute behavior whose adverse effects could readily be avoided by the potential victims – either business entities or natural persons. And the balancing of harm against legitimate business justifications would encompass the assessment of procompetitive rationales that is a core element of a rule of reason analysis in cases arising under competition law.

In Intel, the most notorious of the recent FTC Section 5 antitrust actions, the Commission brought (and settled) a straightforward (if unwinnable) Section 2 case as a Section 5 case (with Section 2 “tag along” claims), using the justification that it simply couldn’t win a Section 2 case under current jurisprudence. Intel presumably settled the case because the absence of judicial limits under Section 5 made its outcome far less certain — and presumably the FTC brought the case under Section 5 for the same reason.

In Intel, there was no effort to distinguish Section 5 grounds from those under Section 2. Rather, the FTC claimed that the limiting jurisprudence under Section 2 wasn’t meant to rein in agencies, but merely private plaintiffs. This claim falls flat, as one of us (Geoff) has noted:

[Chairman] Leibowitz’ continued claim that courts have reined in Sherman Act jurisprudence only out of concern with the incentives and procedures of private enforcement, and not out of a concern with a more substantive balancing of error costs—errors from which the FTC is not, unfortunately immune—seems ridiculous to me. To be sure (as I said before), the procedural background matters as do the incentives to bring cases that may prove to be inefficient.

But take, for example, Twombly, mentioned by Leibowitz as one of the cases that has recently reined in Sherman Act enforcement in order to constrain overzealous private enforcement (and thus not in a way that should apply to government enforcement). . . .

But the over-zealousness of private plaintiffs is not all [Twombly] was about, as the Court made clear:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market. Accordingly, we have previously hedged against false inferences from identical behavior at a number of points in the trial sequence.

Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. [Citations omitted].

The Court was appropriately concerned with the ability of decision-makers to separate pro-competitive from anticompetitive conduct. Even when the FTC brings cases, it and the court deciding the case must make these determinations. And, while the FTC may bring fewer strike suits, it isn’t limited to challenging conduct that is simple to identify as anticompetitive. Quite the opposite, in fact—the government has incentives to develop and bring suits proposing novel theories of anticompetitive conduct and of enforcement (as it is doing in the Intel case, for example).

Problems with Unleashing Section 5

It would be a serious problem — as the Members of Congress who’ve written letters seem to realize — if Section 5 were used to sidestep the important jurisprudential limitations on Section 2 by focusing on such unsupported theories as “reduction in consumer choice” instead of Section 2’s well-established consumer welfare standard. As Geoff has noted:

Following Sherman Act jurisprudence, traditionally the FTC has understood (and courts have demanded) that antitrust enforcement . . . requires demonstrable consumer harm to apply. But this latest effort reveals an agency pursuing an interpretation of Section 5 that would give it unprecedented and largely-unchecked authority. In particular, the definition of “unfair” competition wouldn’t be confined to the traditional antitrust measures — reduction in output or an output-reducing increase in price — but could expand to, well, just about whatever the agency deems improper.

* * *

One of the most important shifts in antitrust over the past 30 years has been the move away from indirect and unreliable proxies of consumer harm toward a more direct, effects-based analysis. Like the now archaic focus on market concentration in the structure-conduct-performance framework at the core of “old” merger analysis, the consumer choice framework [proposed by Commissioner Rosch as a cause of action under Section 5] substitutes an indirect and deeply flawed proxy for consumer welfare for assessment of economically relevant economic effects. By focusing on the number of choices, the analysis shifts attention to the wrong question.

The fundamental question from an antitrust perspective is whether consumer choice is a better predictor of consumer outcomes than current tools allow. There doesn’t appear to be anything in economic theory to suggest that it would be. Instead, it reduces competitive analysis to a single attribute of market structure and appears susceptible to interpretations that would sacrifice a meaningful measure of consumer welfare (incorporating assessment of price, quality, variety, innovation and other amenities) on economically unsound grounds. It is also not the law.

Commissioner Kovacic echoed this in his dissent in N-Data:

More generally, it seems that the Commission’s view of unfairness would permit the FTC in the future to plead all of what would have been seen as competition-related infringements as constituting unfair acts or practices.

And the same concerns animate Kovacic’s belief (drawn from an article written with then-Attorney Advisor Mark Winerman) that courts will continue to look with disapproval on efforts by the FTC to expand its powers:

We believe that UMC should be a competition-based concept, in the modern sense of fostering improvements in economic performance rather than equating the health of the competitive process with the wellbeing of individual competitors, per se. It should not, moreover, rely on the assertion in [the Supreme Court’s 1972 Sperry & Hutchinson Trading Stamp case] that the Commission could use its UMC authority to reach practices outside both the letter and spirit of the antitrust laws. We think the early history is now problematic, and we view the relevant language in [Sperry & Hutchinson] with skepticism.

Representatives Eshoo and Lofgren were even more direct in their letter:

Expanding the FTC’s Section 5 powers to include antitrust matters could lead to overbroad authority that amplifies uncertainty and stifles growth. . . . If the FTC intends to litigate under this interpretation of Section 5, we strongly urge the FTC to reconsider.

But it isn’t only commentators and Congressmen who point to this limitation. The FTC Act itself contains such a limitation. Section 5(n) of the Act, the provision added by Congress in 1994 to codify the core principles of the FTC’s 1980 Unfairness Policy Statement, says that:

The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such 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. [Emphasis added].

In other words, Congress has already said, quite clearly, that Section 5 isn’t a blank check. Yet Chairman Leibowitz seems to be banking on the dearth of direct judicial precedent saying so to turn it into one — as do those who would cheer on a Section 5 antitrust case (against Google, Intel or anyone else). Given the unique breadth of the FTC’s jurisdiction over the entire economy, the agency would again threaten to become a second national legislature, capable of regulating nearly the entire economy.

The Commission has tried — and failed — to bring such cases before the courts in recent years. But the judiciary has not been receptive to an invigoration of Section 5 for several reasons. Chief among these is that the agency simply hasn’t defined the scope of its power over unfair competition under the Act, and the courts hesitate to let the Commission set the limits of its own authority. As Kovacic and Winerman have noted:

The first [reason for judicial reluctance in Section 5 cases] is judicial concern about the apparent absence of limiting principles. The tendency of the courts has been to endorse limiting principles that bear a strong resemblance to standards familiar to them from Sherman Act and Clayton Act cases. The cost-benefit concepts devised in rule of reason cases supply the courts with natural default rules in the absence of something better.

The Commission has done relatively little to inform judicial thinking, as the agency has not issued guidelines or policy statements that spell out its own view about the appropriate analytical framework. This inactivity contrasts with the FTC’s efforts to use policy statements to set boundaries for the application of its consumer protection powers under Section 5.

This concern was stressed in the letter sent by Senator DeMint and other Republican Senators to Chairman Leibowitz:

[W]e are concerned about the apparent eagerness of the Commission under your leadership to expand Section 5 actions without a clear indication of authority or a limiting principle. When a federal regulatory agency uses creative theories to expand its activities, entrepreneurs may be deterred from innovating and growing lest they be targeted by government action.

As we have explained many times (see, e.g., here, here and here), a Section 2 case against Google will be an uphill battle. As far as we have seen publicly, complainants have offered only harm to competitors — not harm to consumers — to justify such a case. It is little surprise, then, that the agency (or, more accurately, Chairman Leibowitz and Commissioner Rosch) may be seeking to use the less-limited power of Section 5 to mount such a case.

In a blog post in 2011, Geoff wrote:

Commissioner Rosch has claimed that Section Five could address conduct that has the effect of “reducing consumer choice” — an effect that a very few commentators support without requiring any evidence that the conduct actually reduces consumer welfare. Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by competitive behavior.

The U.S. has a long tradition of resisting enforcement based on harm to competitors without requiring a commensurate, strong showing of harm to consumers — an economically-sensible tradition aimed squarely at minimizing the likelihood of erroneous enforcement. The FTC’s invigorated interest in Section Five contemplates just such wrong-headed enforcement, however, to the inevitable detriment of the very consumers the agency is tasked with protecting.

In fact, the theoretical case against Google depends entirely on the ways it may have harmed certain competitors rather than on any evidence of actual harm to consumers (and in the face of ample evidence of significant consumer benefits).

* * *

In each of [the complaints against Google], the problem is that the claimed harm to competitors does not demonstrably translate into harm to consumers.

For example, Google’s integration of maps into its search results unquestionably offers users an extremely helpful presentation of these results, particularly for users of mobile phones. That this integration might be harmful to MapQuest’s bottom line is not surprising — but nor is it a cause for concern if the harm flows from a strong consumer preference for Google’s improved, innovative product. The same is true of the other claims. . . .

To the extent that the FTC brings an antitrust case against Google under Section 5, using the Act to skirt the jurisprudential limitations (and associated economic rigor) that make a Section 2 case unwinnable, it would be contravening congressional intent, judicial precedent, the plain language of the FTC Act, and the collected wisdom of the antitrust commentariat that sees such an action as inappropriate. This includes not just traditional antitrust-skeptics like us, but even antitrust-enthusiasts like Allen Grunes, who has written:

The FTC, of course, has Section 5 authority. But there is well-developed case law on monopolization under Section 2 of the Sherman Act. There are no doctrinal “gaps” that need to be filled. For that reason it would be inappropriate, in my view, to use Section 5 as a crutch if the evidence is insufficient to support a case under Section 2.

As Geoff has said:

Modern antitrust analysis, both in scholarship and in the courts, quite properly rejects the reductive and unsupported sort of theories that would undergird a Section 5 case against Google. That the FTC might have a better chance of winning a Section 5 case, unmoored from the economically sound limitations of Section 2 jurisprudence, is no reason for it to pursue such a case. Quite the opposite: When consumer welfare is disregarded for the sake of the agency’s power, it ceases to further its mandate. . . . But economic substance, not self-aggrandizement by rhetoric, should guide the agency. Competition and consumers are dramatically ill-served by the latter.

Conclusion: What To Do About Unfairness?

So, what should the FTC do with Section 5? The right answer may be “nothing” (and probably is, in our opinion). But even those who think something should be done to apply the Act more broadly to allegedly anticompetitive conduct should be able to agree that the FTC ought not bring a case under Section 5’s UDAP language without first defining with analytical rigor what its limiting principles are.

Rather than attempting to do this in the course of a single litigation, the agency ought to heed Kovacic and Winerman’s advice and do more to “inform judicial thinking” such as by “issu[ing] guidelines or policy statements that spell out its own view about the appropriate analytical framework.” The best way to start that process would be for whoever succeeds Leibowitz as chairman to convene a workshop on the topic. (As one of us (Berin) has previously suggested, the FTC is long overdue on issuing guidelines to explain how it has applied its Unfairness and Deception Policy Statements in UDAP consumer protection cases. Such a workshop would dovetail nicely with this.)

The question posed should not presume that Section 5’s UDAP language ought to be used to reach conduct actionable under the antitrust statutes at all. Rather, the fundamental question to be asked is whether the use of Section 5 in antitrust cases is a relic of a bygone era before antitrust law was given analytical rigor by economics. If the FTC cannot rigorously define an interpretation of Section 5 that will actually serve consumer welfare — which the Supreme Court has defined as the proper aim of antitrust law — Congress should explicitly circumscribe it once and for all, limiting Section 5 to protecting consumers against unfair and deceptive acts and practices and, narrowly, prohibiting unfair competition in the form of invitations to collude. The FTC (along with the DOJ and the states) would still regulate competition through the existing antitrust laws. This might be the best outcome of all.

Previous commentary by us on Section 5:

In Antitrust & Competition, Banking, Economic Theory, Error Costs, Exclusionary Conduct, Federal Trade Commission, Financial Regulation, Google, Justice Department, Monopolization, Platforms, Regulation, Section 5 , , , , , , , , , , , ,
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