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Today, for the first time in its 100-year history, the FTC issued enforcement guidelines for cases brought by the agency under the Unfair Methods of Competition (“UMC”) provisions of Section 5 of the FTC Act.

The Statement of Enforcement Principles represents a significant victory for Commissioner Joshua Wright, who has been a tireless advocate for defining and limiting the scope of the Commission’s UMC authority since before his appointment to the FTC in 2013.

As we’ve noted many times before here at TOTM (including in our UMC Guidelines Blog Symposium), FTC enforcement principles for UMC actions have been in desperate need of clarification. Without any UMC standards, the FTC has been free to leverage its costly adjudication process into settlements (or short-term victories) and businesses have been left in the dark as to what what sorts of conduct might trigger enforcement. Through a series of unadjudicated settlements, UMC unfairness doctrine (such as it is) has remained largely within the province of FTC discretion and without judicial oversight. As a result, and either by design or by accident, UMC never developed a body of law encompassing well-defined goals or principles like antitrust’s consumer welfare standard.

Commissioner Wright has long been at the forefront of the battle to rein in the FTC’s discretion in this area and to promote the rule of law. Soon after joining the Commission, he called for Section 5 guidelines that would constrain UMC enforcement to further consumer welfare, tied to the economically informed analysis of competitive effects developed in antitrust law.

Today’s UMC Statement embodies the essential elements of Commissioner Wright’s proposal. Under the new guidelines:

  1. The Commission will make UMC enforcement decisions based on traditional antitrust principles, including the consumer welfare standard;
  2. Only conduct that would violate the antitrust rule of reason will give rise to enforcement, and the Commission will not bring UMC cases without evidence demonstrating that harm to competition outweighs any efficiency or business justifications for the conduct at issue; and
  3. The Commission commits to the principle that it is more appropriate to bring cases under the antitrust laws than under Section 5 when the conduct at issue could give rise to a cause of action under the antitrust laws. Notably, this doesn’t mean that the agency gets to use UMC when it thinks it might lose under the Sherman or Clayton Acts; rather, it means UMC is meant only to be a gap-filler, to be used when the antitrust statutes don’t apply at all.

Yes, the Statement is a compromise. For instance, there is no safe harbor from UMC enforcement if any cognizable efficiencies are demonstrated, as Commissioner Wright initially proposed.

But by enshrining antitrust law’s consumer welfare standard in future UMC caselaw, by obligating the Commission to assess conduct within the framework of the well-established antitrust rule of reason, and by prioritizing antitrust over UMC when both might apply, the Statement brings UMC law into the world of modern antitrust analysis. This is a huge achievement.

It’s also a huge achievement that a Statement like this one would be introduced by Chairwoman Ramirez. As recently as last year, Ramirez had resisted efforts to impose constraints on the FTC’s UMC enforcement discretion. In a 2014 speech Ramirez said:

I have expressed concern about recent proposals to formulate guidance to try to codify our unfair methods principles for the first time in the Commission’s 100 year history. While I don’t object to guidance in theory, I am less interested in prescribing our future enforcement actions than in describing our broad enforcement principles revealed in our recent precedent.

The “recent precedent” that Ramirez referred to is precisely the set of cases applying UMC to reach antitrust-relevant conduct that led to Commissioner Wright’s efforts. The common law of consent decrees that make up the precedent Ramirez refers to, of course, are not legally binding and provide little more than regurgitated causes of action.

But today, under Congressional pressure and pressure from within the agency led by Commissioner Wright, Chairwoman Ramirez and the other two Democratic commissioners voted for the Statement.

Competitive Effects Analysis Under the Statement

As Commissioner Ohlhausen argues in her dissenting statement, the UMC Statement doesn’t remove all enforcement discretion from the Commission — after all, enforcement principles, like standards in law generally, have fuzzy boundaries.

But what Commissioner Ohlhausen seems to miss is that, by invoking antitrust principles, the rule of reason and competitive effects analysis, the Statement incorporates by reference 125 years of antitrust law and economics. The Statement itself need not go into excessive detail when, with only a few words, it brings modern antitrust jurisprudence embodied in cases like Trinko, Leegin, and Brooke Group into UMC law.

Under the new rule of reason approach for UMC, the FTC will condemn conduct only when it causes or is likely to cause “harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.” In other words, the evidence must demonstrate net harm to consumers before the FTC can take action. That’s a significant constraint.

As noted above, Commissioner Wright originally proposed a safe harbor from FTC UMC enforcement whenever cognizable efficiencies are present. The Statement’s balancing test is thus a compromise. But it’s not really a big move from Commissioner Wright’s initial position.

Commissioner Wright’s original proposal tied the safe harbor to “cognizable” efficiencies, which is an exacting standard. As Commissioner Wright noted in his Blog Symposium post on the subject:

[T]he efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines. As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service. Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted. Under this strict standard, the FTC would almost certainly have no trouble demonstrating no cognizable efficiencies exist in Dan’s “blowing up of the competitor’s factory” example because the very act of sabotage amounts to an anticompetitive reduction in output.

The difference between the safe harbor approach and the balancing approach embodied in the Statement is largely a function of administrative economy. Before, the proposal would have caused the FTC to err on the side of false negatives, possibly forbearing from bringing some number of welfare-enhancing cases in exchange for a more certain reduction in false positives. Now, there is greater chance of false positives.

But the real effect is that more cases will be litigated because, in the end, both versions would require some degree of antitrust-like competitive effects analysis. Under the Statement, if procompetitive efficiencies outweigh anticompetitive harms, the defendant still wins (and the FTC is to avoid enforcement). Under the original proposal fewer actions might be brought, but those that are brought would surely settle. So one likely outcome of choosing a balancing test over the safe harbor is that more close cases will go to court to be sorted out. Whether this is a net improvement over the safe harbor depends on whether the social costs of increased litigation and error are offset by a reduction in false negatives — as well as the more robust development of the public good of legal case law.  

Reduced FTC Discretion Under the Statement

The other important benefit of the Statement is that it commits the FTC to a regime that reduces its discretion.

Chairwoman Ramirez and former Chairman Leibowitz — among others — have embraced a broader role for Section 5, particularly in order to avoid the judicial limits on antitrust actions arising out of recent Supreme Court cases like Trinko, Leegin, Brooke Group, Linkline, Weyerhaeuser and Credit Suisse.

For instance, as former Chairman Leibowitz said in 2008:

[T]he Commission should not be tied to the more technical definitions of consumer harm that limit applications of the Sherman Act when we are looking at pure Section 5 violations.

And this was no idle threat. Recent FTC cases, including Intel, N-Data, Google (Motorola), and Bosch, could all have been brought under the Sherman Act, but were brought — and settled — as Section 5 cases instead. Under the new Statement, all four would likely be Sherman Act cases.

There’s little doubt that, left unfettered, Section 5 UMC actions would only have grown in scope. Former Chairman Leibowitz, in his concurring opinion in Rambus, described UMC as

a flexible and powerful Congressional mandate to protect competition from unreasonable restraints, whether long-since recognized or newly discovered, that violate the antitrust laws, constitute incipient violations of those laws, or contravene those laws’ fundamental policies.

Both Leibowitz and former Commissioner Tom Rosch (again, among others) often repeated their views that Section 5 permitted much the same actions as were available under Section 2 — but without the annoyance of those pesky, economically sensible, judicial limitations. (Although, in fairness, Leibowitz also once commented that it would not “be wise to use the broader [Section 5] authority whenever we think we can’t win an antitrust case, as a sort of ‘fallback.’”)

In fact, there is a long and unfortunate trend of FTC commissioners and other officials asserting some sort of “public enforcement exception” to the judicial limits on Sherman Act cases. As then Deputy Director for Antitrust in the Bureau of Economics, Howard Shelanski, told Congress in 2010:

The Commission believes that its authority to prevent “unfair methods of competition” through Section 5 of the Federal Trade Commission Act enables the agency to pursue conduct that it cannot reach under the Sherman Act, and thus avoid the potential strictures of Trinko.

In this instance, and from the context (followed as it is by a request for Congress to actually exempt the agency from Trinko and Credit Suisse!), it seems that “reach” means “win.”

Still others have gone even further. Tom Rosch, for example, has suggested that the FTC should challenge Patent Assertion Entities under Section 5 merely because “we have a gut feeling” that the conduct violates the Act and it may not be actionable under Section 2.

Even more egregious, Steve Salop and Jon Baker advocate using Section 5 to implement their preferred social policies — in this case to reduce income inequality. Such expansionist views, as Joe Sims recently reminded TOTM readers, hearken back to the troubled FTC of the 1970s:  

Remember [former FTC Chairman] Mike Pertschuck saying that Section 5 could possibly be used to enforce compliance with desirable energy policies or environmental requirements, or to attack actions that, in the opinion of the FTC majority, impeded desirable employment programs or were inconsistent with the nation’s “democratic, political and social ideals.” The two speeches he delivered on this subject in 1977 were the beginning of the end for increased Section 5 enforcement in that era, since virtually everyone who heard or read them said:  “Whoa! Is this really what we want the FTC to be doing?”

Apparently, for some, it is — even today. But don’t forget: This was the era in which Congress actually briefly shuttered the FTC for refusing to recognize limits on its discretion, as Howard Beales reminds us:

The breadth, overreaching, and lack of focus in the FTC’s ambitious rulemaking agenda outraged many in business, Congress, and the media. Even the Washington Post editorialized that the FTC had become the “National Nanny.” Most significantly, these concerns reverberated in Congress. At one point, Congress refused to provide the necessary funding, and simply shut down the FTC for several days…. So great were the concerns that Congress did not reauthorize the FTC for fourteen years. Thus chastened, the Commission abandoned most of its rulemaking initiatives, and began to re-examine unfairness to develop a focused, injury-based test to evaluate practices that were allegedly unfair.

A truly significant effect of the Policy Statement will be to neutralize the effort to use UMC to make an end-run around antitrust jurisprudence in order to pursue non-economic goals. It will now be a necessary condition of a UMC enforcement action to prove a contravention of fundamental antitrust policies (i.e., consumer welfare), rather than whatever three commissioners happen to agree is a desirable goal. And the Statement puts the brakes on efforts to pursue antitrust cases under Section 5 by expressing a clear policy preference at the FTC to bring such cases under the antitrust laws.

Commissioner Ohlhausen’s objects that

the fact that this policy statement requires some harm to competition does little to constrain the Commission, as every Section 5 theory pursued in the last 45 years, no matter how controversial or convoluted, can be and has been couched in terms of protecting competition and/or consumers.

That may be true, but the same could be said of every Section 2 case, as well. Commissioner Ohlhausen seems to be dismissing the fact that the Statement effectively incorporates by reference the last 45 years of antitrust law, too. Nothing will incentivize enforcement targets to challenge the FTC in court — or incentivize the FTC itself to forbear from enforcement — like the ability to argue Trinko, Leegin and their ilk. Antitrust law isn’t perfect, of course, but making UMC law coextensive with modern antitrust law is about as much as we could ever reasonably hope for. And the Statement basically just gave UMC defendants blanket license to add a string of “See Areeda & Hovenkamp” cites to every case the FTC brings. We should count that as a huge win.

Commissioner Ohlhausen also laments the brevity and purported vagueness of the Statement, claiming that

No interpretation of the policy statement by a single Commissioner, no matter how thoughtful, will bind this or any future Commission to greater limits on Section 5 UMC enforcement than what is in this exceedingly brief, highly general statement.

But, in the end, it isn’t necessarily the Commissioners’ self-restraint upon which the Statement relies; it’s the courts’ (and defendants’) ability to take the obvious implications of the Statement seriously and read current antitrust precedent into future UMC cases. If every future UMC case is adjudicated like a Sherman or Clayton Act case, the Statement will have been a resounding success.

Arguably no FTC commissioner has been as successful in influencing FTC policy as a minority commissioner — over sustained opposition, and in a way that constrains the agency so significantly — as has Commissioner Wright today.

Geoffrey Manne is Lecturer in Law at Lewis & Clark Law School and Executive Director of the International Center for Law & Economics

Josh and Maureen are to be commended for their important contributions to the discussion over the proper scope of the FTC’s Section 5 enforcement authority. I have commented extensively on UMC and Section 5, Josh’s statement, and particularly the problems if UMC enforcement against the use of injunctions to enforce FRAND-encumbered SEPs before (see, for example, here, here and here). I’d like to highlight here a couple of the most important issues from among these comments along with a couple of additional ones.

First, there is really no sensible disagreement over Josh’s harm to competition prong. And to the extent there is disagreement over the proper role for efficiencies, given the existence of compelling arguments that we don’t need Section 5 at all (see, e.g., Joe Sims and James Cooper), what might have seemed like a radical position in Josh’s statement that the FTC enforce UMC only where no efficiencies exist, Josh’s position is actually something of a middle ground. In any case, the first prong of Josh’s statement (the harm to competition requirement) really should attract unanimity, as it essentially has here today, and all of the FTC’s commissioners should come out and say so, even if debate persists over the second prong. This alone would provide an enormous amount of certainty and sense to the FTC’s UMC enforcement decisions.

Second, sensible, predictable guidance is essential. In her recent speech, echoing the fundamental issue laid out so well in Josh’s statement and elaborated on in his accompanying speech, Maureen notes that:

For many decades, the Commission’s exercise of its UMC authority has launched the agency into a sea of uncertainty, much like the agency weathered when using its unfairness authority in the consumer protection area in the 1970s. In issuing our 1980 statement on the concept of “unfair acts or practices” under our consumer protection authority, the Commission acknowledged the uncertainty that had surrounded the concept of unfairness, admitting that “this uncertainty has been honestly troublesome for some businesses and some members of the legal profession.” This characterization just as aptly describes the state of our UMC authority today.

It seems uncontroversial that some guidance is required, and a pseudo-common law of un-adjudicated settlements lacking any doctrinal analysis simply doesn’t provide sufficient grounds to separate the fair from the unfair. (What follows is drawn from our amicus brief in the Wyndham case).

The FTC’s current approach to UMC enforcement denies companies “a reasonable opportunity to know what is prohibited” and thus follow the law. The FTC has previously suggested that its settlements and Congressional testimony offers all the guidance a company would need—see, e.g., here and here, where Chairwoman Ramirez noted that

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its UMC authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community. It is impossible to imagine a court faulting the FTC for failure to adhere to a previous settlement, particularly because settlements are not readily generalizable and bind only the parties who agree to them. As we put it in our Wyndham amicus brief:

Even setting aside this basic legal principle, the gradual accretion of these unadjudicated settlements does not solve the vagueness problem: Where guidelines provide cumulative analysis of previous enforcement decisions to establish general principles, these settlements are devoid of doctrinal analysis and offer little more than an infinite regress of unadjudicated assertions.

Rulemaking is generally preferable to case-by-case adjudication as a way to develop agency-enforced law because rulemaking both reduces vagueness and constrains the mischief that unconstrained agency actions may cause. As the Court noted in SEC v. Chenery Corp.,

The function of filling in the interstices of [a statute] should be performed, as much as possible, through this quasi-legislative promulgation of rules to be applied in the future.

Without Article III court decisions developing binding legal principles ,and with no other meaningful form of guidance from the FTC, the law will remain unconstitutionally vague. And the FTC’s approach to enforcement also allows the FTC to act both arbitrarily and discriminatorily—backed by the costly threat of the CID process and Part III adjudication. This means the company faces two practically certain defeats—before the administrative law judge and then the full Commission, each a public relations disaster. The FTC appears to be perfectly willing to use negative media to encourage settlements: The House Oversight Committee is currently investigating whether a series of leaks by FTC staff to media last year were intended to pressure Google to settle the FTC’s antitrust investigation into the company’s business practices.

Third, if the FTC doesn’t act to constrain itself, the courts or Congress will do so, and may do more damage to the FTC’s authority than any self-imposed constraints would.

The power to determine whether the practices of almost any American business are “unfair” methods of competition (particularly if UMC retains the broad reach Tim Wu outlines in his post) makes the FTC uniquely powerful. This power, if it is to be used sensibly, allows the FTC to protect consumers from truly harmful business practices not covered by the FTC’s general consumer protection authority. But without effective enforcement of clear limiting principles, this power may be stretched beyond what Congress intended.

In 1964, the Commission began using its unfairness power to ban business practices that it determined offended “public policy.” Emboldened by vague Supreme Court dicta from Sperry & Hutchinson comparing the agency to a “court of equity,” the Commission set upon a series of rulemakings and enforcement actions so sweeping that the Washington Post dubbed the agency the “National Nanny.” The FTC’s actions eventually prompted Congress to briefly shut down the agency to reinforce the point that it had not intended the agency to operate with such expansive authority. The FTC survived as an institution only because, in 1980, it (unanimously) issued a Policy Statement on Unfairness laying out basic limiting principles to constrain its power and assuring Congress that these principles would be further developed over time—principles that Congress then codified in Section 5(n) of the FTC Act.

And for a time, the Commission used its unfairness power sparingly and carefully, largely out of fear of reawakening Congressional furor. Back in 1980, the FTC itself declared that

The task of identifying unfair trade practices was therefore assigned to the Commission, subject to judicial review, in the expectation that the underlying criteria would evolve and develop over time.

Yet we know little more today than we did in 1980 about how the FTC analyzes each prong of Section 5.

Moreover, courts may not support enforcement given this ambiguity, and in our Wyndham brief we supported Wyndham’s motion to dismiss for exactly this reason (and that was brought under the Commission’s unfairness authority where it even has some guidelines). As we wrote:

Since the problem is a lack of judicial adjudication, it might seem counter-intuitive that the court should dismiss the FTC’s suit on the pleadings. But this is precisely the form of adjudication required: The FTC needs to be told that its complaints do not meet the minimum standards required to establish a violation of Section 5 because otherwise there is little reason to think that the FTC’s complaints will not continue to be the Commission’s primary means of building law (what amounts to “non-law law”). But even if the FTC re-files its unadjudicated complaint to explain its analysis of the prongs of the Unfairness Doctrine, it will not have solved yet another fundamental problem: its failure to provide Wyndham with sufficient guidance ex ante as to what “reasonable” data security practices would be.

The same could be said of the FTC’s UMC enforcement. Section 5(n) applies to UMC, and states 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. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

Finally, applying this to FRAND-encumbered SEPs, as I have previously discussed, is problematic. As Kobayashi and Wright note in discussing the N-Data case,

[T]he truth is that there was little chance the FTC could have prevailed under the more rigorous Section 2 standard that anchors the liability rule to a demanding standard requiring proof of both exclusionary conduct and competitive harm. One must either accept the proposition that the FTC sought Section 5 liability precisely because there was no evidence of consumer harm or that the FTC believed there was evidence of consumer harm but elected to file the Complaint based only upon the Section 5 theory to encourage an expansive application of that Section, a position several Commissioners joining the Majority Statement have taken in recent years. Neither of these interpretations offers much evidence that N-Data is sound as a matter of prosecutorial discretion or antitrust policy.

None of the FTC’s SEP cases has offered anything approaching proof of consumer harm, and this is where any sensible limiting principles must begin—as just about everyone here today seems to agree. Moreover, even if they did adduce evidence of harm, the often-ignored problem of reverse holdup raises precisely the concern about over-enforcement that Josh’s “no efficiencies” prong is meant to address. Holdup may raise consumer prices (although the FTC has not presented evidence of this), but reverse holdup may do as much or more damage.

The use of injunctions to enforce SEPs increases innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses. An unfettered UMC authority will systematically curtail these benefits, quite possibly without countervailing positive effects.

And as I noted in a post yesterday, these costs are real. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to: by avoiding the otherwise-consumer-welfare enhancing standardization process entirely—as statements made at a recent event demonstrate:

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

Section 5 is a particularly problematic piece of this, and sensible limits like those Josh proposes would go a long way toward mitigating the problem—without removing enforcement authority in the face of real competitive harm, which remains available under the Sherman Act.

On July 24, the Federal Trade Commission issued a modified complaint and consent order in the Google/Motorola case. The FTC responded to the 25 comments on the proposed Order by making several amendments, but the Final Order retains the original order’s essential restrictions on injunctions, as the FTC explains in a letter accompanying the changes. With one important exception, the modifications were primarily minor changes to the required process by which Google/Motorola must negotiate and arbitrate with potential licensees. Although an improvement on the original order, the Complaint and Final Order’s continued focus on the use of injunctions to enforce SEPs presents a serious risk of consumer harm, as I discuss below.

The most significant modification in the new Complaint is the removal of the original UDAP claim. As suggested in my comments on the Order, there is no basis in law for such a claim against Google, and it’s a positive step that the FTC seems to have agreed. Instead, the FTC ended up resting its authority solely upon an Unfair Methods of Competition claim, even though the Commission failed to develop any evidence of harm to competition—as both Commissioner Wright and Commissioner Ohlhausen would (sensibly) require.

Unfortunately, the FTC’s letter offers no additional defense of its assertion of authority, stating only that

[t]he Commission disagrees with commenters who argue that the Commission’s actions in this case are outside of its authority to challenge unfair methods of competition under Section 5 and lack a limiting principle. As reflected in the Commission’s recent statements in Bosch and the Commission’s initial Statement in this matter, this action is well within our Section 5 authority, which both Congress and the Supreme Court have expressly deemed to extend beyond the Sherman Act.

Another problem, as noted by Commissioner Ohlhausen in her dissent from the original order, is that

the consent agreement creates doctrinal confusion. The Order contradicts the decisions of federal courts, standard-setting organizations (“SSOs”), and other stakeholders about the availability of injunctive relief on SEPs and the meaning of concepts like willing licensee and FRAND.

The FTC’s statements in Bosch and this case should not be thought of as law on par with actual court decisions unless we want to allow the FTC to determine the scope of its own authority unilaterally.

This is no small issue. On July 30, the FTC used the Google settlement, along with the settlement in Bosch, as examples of the FTC’s authority in the area of policing SEPs during a hearing on the issue. And as FTC Chairwoman Ramirez noted in response to questions for the record in a different hearing earlier in 2013,

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But because nearly all of these cases have resulted in consent orders with an administrative agency and have not been adjudicated in court, they aren’t, in fact, developed “in the manner of common law.” Moreover, settlements aren’t binding on anyone except the parties to the settlement. Nevertheless, the FTC has pointed to these sorts of settlements (and congressional testimony summarizing them) as sufficient guidance to industry on the scope of its Section 5 authority. But as we noted in our amicus brief in the Wyndham litigation (in which the FTC makes this claim in the context of its “unfair or deceptive acts or practices” authority):

Settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its unfairness authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community.

Beyond this more general problem, the Google Final Order retains its own, substantive problem: considerable constraints upon injunctions. The problem with these restraints are twofold: (1) Injunctions are very important to an efficient negotiation process, as recognized by the FTC itself; and (2) if patent holders may no longer pursue injunctions consistently with antitrust law, one would expect a reduction in consumer welfare.

In its 2011 Report on the “IP Marketplace,” the FTC acknowledged the important role of injunctions in preserving the value of patents and in encouraging efficient private negotiation.

Second, the credible threat of an injunction deters infringement in the first place. This results from the serious consequences of an injunction for an infringer, including the loss of sunk investment. Third, a predictable injunction threat will promote licensing by the parties. Private contracting is generally preferable to a compulsory licensing regime because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning efficient agreements. But denying an injunction every time an infringer’s switching costs exceed the economic value of the invention would dramatically undermine the ability of a patent to deter infringement and encourage innovation. For this reason, courts should grant injunctions in the majority of cases.

Building on insights from Commissioner Wright and Professor Kobayashi, I argued in my comments that injunctions create conditions that

increase innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare.

Monopoly power granted by IP law encourages innovation because it incentivizes creativity through expected profits. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses.

And this is precisely what has happened. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to—by avoiding the otherwise-consumer-welfare enhancing standardization process entirely.

Thus, for example, at a recent event sponsored by Global Competition Review (gated), representatives from Nokia, Ericsson, Siemens and Qualcomm made no bones about the problems they see and where they’re headed if they persist:

[Jenni Lukander, global head of competition law at Nokia] said the problem of “free-riding”, whereby technology companies adopt standard essential patents (SEPs) without complying with fair, reasonable and non-discriminatory (FRAND) licensing terms was a “far bigger problem” than patent holders pursuing injunctive relief. She said this behaviour was “unsustainable”, as it discouraged innovation and jeopardised standardisation.

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

The fact that every licence negotiation takes places “under the threat of injunction litigation” is not a sign of failure, said Lukander, but an indicator of the system working “as it was designed to work”.

This, said [Dan Hermele, director of IP rights and licensing for Qualcomm Europe], amounted to “reverse hold-up”. “The licensor is pressured to accept less than reasonable licensing terms due to the threat of unbalanced regulatory intervention,” he said, adding that the trend was moving to an “infringe and litigate model”, which threatened to harm innovators, particularly small and medium-sized businesses, “for whom IPR is their life blood”.

Beat Weibel, chief IP counsel at Siemens, said…innovation can only be beneficial if it occurs within a “safe and strong IP system,” he said, where a “willing licensee is favoured over a non-willing licensee” and the enforcer is not a “toothless tiger”.

It remains to be seen if the costs to consumers from firms curtailing their investments in R&D or withholding their patents from the standard-setting process will outweigh the costs (yes, some costs do exist; the patent system is not frictionless and it is far from perfect, of course) from the “over”-enforcement of SEPs lamented by critics. But what is clear is that these costs can’t be ignored. Reverse hold-up can’t be wished away, and there is a serious risk that the harm likely to be caused by further eroding the enforceability of SEPs by means of injunctions will significantly outweigh whatever benefits it may also confer.

Meanwhile, stay tuned for tomorrow’s TOTM blog symposium on “Regulating the Regulators–Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority” for much more discussion on this issue.

Co-authored with Berin Szoka

FTC Commissioner Wright issued today his Policy Statement on enforcement of Section 5 of the FTC Act against Unfair Methods of Competition (UMC)—the one he promised in April. Wright introduced the Statement in an important policy speech this morning before the Executive Committee Meeting of the New York State Bar Association’s Antitrust Section. Both the Statement and the speech are essential reading, and, collectively, they present a compelling and comprehensive vision for Section 5 UMC reform at the Commission.

As we’ve been saying for some time, and as Wright notes at the outset of his Statement:

In order for enforcement of its unfair methods of competition authority to promote consistently the Commission’s mission of protecting competition, the Commission must articulate a clear framework for its application.

Significantly, in addition to offering important certainty to guide business actions, Wright bases his proposed Policy Statement on the error cost framework:

The Commission must formulate a standard that distinguishes between acceptable business practices and business practices that constitute an unfair method of competition in order to provide firms with adequate guidance as to what conduct may be unlawful.  Articulating a clear and predictable standard for what constitutes an unfair method of competition is important because the Commission’s authority to condemn unfair methods of competition allows it to break new ground and challenge conduct based upon theories not previously enshrined in Sherman Act or Clayton Act jurisprudence.

As far as we know, this Statement is the most significant effort yet to cabin FTC enforcement decisions within a coherent error-cost framework, and it is especially welcome.

Ironically, this is former Chairman Jon Leibowitz’s true legacy: His efforts to expand Section 5 to challenge conduct under novel theories, devoid of economic grounding and without proof of anticompetitive harm (in cases like Intel, N-Data and Google, among others) brought into stark relief the potential risks of an unfettered, active Section 5. Commissioner Wright’s Statement can be seen as the unintended culmination of—and backlash against—Leibowitz’s Section 5 campaign.

Particularly given the novelty of circumstances that might come within Section 5’s ambit, the error-cost minimizing structure of Commissioner Wright’s proposed Statement is enormously important. As one of us (Manne) notes in the paper, Innovation and the Limits of Antitrust (co-authored with then-Professor Wright),

Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its procompetitive virtues.

And as Wright’s Statement notes,

This is particularly true if business conduct is novel or takes place within an emerging or rapidly changing industry, and thus where there is little empirical evidence about the conduct’s potential competitive effects.

The high cost and substantial risk of over-enforcement arising from unbounded Section 5 authority counsel strongly in favor of Wright’s Statement restricting Section 5 to minimize these error costs.

Thus, while the specifics matter, of course, the real import of Commissioner Wright’s Statement is in some ways structural: If adopted, it would both bring much needed, basic guidance to the scope of the FTC’s Section 5 authority; just as important, it would constrain (an important aspect of) the FTC’s enforcement discretion within the error cost framework, bringing the sound economic grounding of antitrust law and economics to Section 5, benefiting consumers as well as commerce generally:

This Policy Statement benefits both consumers and the business community by relying on modern economics and antitrust jurisprudence to strengthen the agency’s ability to target anticompetitive conduct and provide clear guidance about the contours of the Commission’s Section 5 authority.

For Wright, this is about saving Section 5 from its ill-defined and improperly deployed history. As he noted in his speech this morning,

In undertaking this task, I think it is important to recall why the Commission’s use of Section 5 has failed to date. In my view, this failure is principally because the Commission has sought to do too much with Section 5, and in so doing, called into serious question whether it has any limits whatsoever. In order to save Section 5, and to fulfill the vision Congress had for this important statute, the Commission must recast its unfair methods of competition authority with an eye toward regulatory humility in order to effectively target plainly anticompetitive conduct….. I believe that doing anything less would betray our obligation as responsible stewards of the Commission and its competition mission, and may ultimately result in the Commission having its Section 5 authority defined for it by the courts, or worse, having that authority completely revoked by Congress.

This means circumscribing the FTC’s Section 5 authority to limit enforcement to cases where the Commission shows both actual harm to competition and the absence of cognizable efficiencies.

The Status Quo

Both together and separately, we’ve discussed the problems with the Section 5 status quo in numerous places, including:

To summarize: The problem is that Section 5 enforcement standards in the unfairness context are non-existent. Former Chairman Jon Leibowitz and former Commissioner Tom Rosch, in particular, have, in several places, argued for expanded use of Section 5, both as a way around judicial limits on the scope of Sherman Act enforcement, as well as as an affirmative tool to enforce the FTC’s mandate. As the Commission’s statement in the N-Data case concluded:

We recognize that some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this Complaint. But the cost of ignoring this particularly pernicious problem is too high. Using our statutory authority to its fullest extent is not only consistent with the Commission’s obligations, but also essential to preserving a free and dynamic marketplace.

The problem is that neither the Commission, the courts nor Congress has defined what, exactly, the “fullest extent” of the FTC’s statutory authority is. As Commissioner Wright noted in this morning’s speech,

In practice, however, the scope of the Commission’s Section 5 authority today is as broad or as narrow as a majority of the commissioners believes that it is.

The Commission’s claim that it applied its authority “broadly (but appropriately)” in N-Data is unsupported and unsupportable. As Commissioner Ohlhausen put it in her dissent in In re Bosch,

I simply do not see any meaningful limiting principles in the enforcement policy laid out in these cases. The Commission statement emphasizes the context here (i.e. standard setting); however, it is not clear why the type of conduct that is targeted here (i.e. a breach of an allegedly implied contract term with no allegation of deception) would not be targeted by the Commission in any other context where the Commission believes consumer harm may result. If the Commission continues on the path begun in N-Data and extended here, we will be policing garden variety breach-of-contract and other business disputes between private parties….

It is important that government strive for transparency and predictability. Before invoking Section 5 to address business conduct not already covered by the antitrust laws (other than perhaps invitations to collude), the Commission should fully articulate its views about what constitutes an unfair method of competition, including the general parameters of unfair conduct and where Section 5 overlaps and does not overlap with the antitrust laws, and how the Commission will exercise its enforcement discretion under Section 5. Otherwise, the Commission runs a serious risk of failure in the courts and a possible hostile legislative reaction, both of which have accompanied previous FTC attempts to use Section 5 more expansively.

This consent does nothing either to legitimize the creative, yet questionable application of Section 5 to these types of cases or to provide guidance to standard-setting participants or the business community at large as to what does and does not constitute a Section 5 violation. Rather, it raises more questions about what limits the majority of the Commission would place on its expansive use of Section 5 authority.

Commissioner Wright’s proposed Policy Statement attempts to remedy these defects, and, in the process, explains why the Commission’s previous, broad applications of the statute are not, in fact, appropriate.

Requirement #1: Harm to Competition

It should go without saying that anticompetitive harm is a basic prerequisite of the FTC’s UMC enforcement. Sadly, however, this has not been the case. As the FTC has, in recent years, undertaken enforcement actions intended to expand its antitrust authority, it has interpreted far too expansively the Supreme Court’s statement in FTC v. Indiana Federation of Dentists that Section 5 contemplates

not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons.

But “against public policy for other reasons” does not mean “without economic basis,” and there is no indication that Congress intended to give the FTC unfettered authority unbounded by economically sensible limits on what constitutes a cognizable harm. As one of us (Manne) has written,

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.

Commissioner Wright’s Statement and its reasoning are consistent with Congressional intent on the limits of the “public policy” rationale in Section 5’s “other” unfairness authority, now enshrined in Section 45(n) of the FTC Act:

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.

While not entirely foreclosing the possibility of other indicia of harm to competition, Wright provides a clear statement of what would constitute Section 5 UMC harm under his standard:

Conduct that results in harm to competition, and in turn, in harm to consumer welfare, typically does so through increased prices, reduced output, diminished quality, or weakened incentives to innovate.

This means is that, among other things, “reduction in consumer choice” is not, by itself, a cognizable harm under Section 5, just as it is not under the antitrust laws. As one of us (Manne) has discussed previously:

Most problematically, Commissioner Rosch has suggested that Section Five could address conduct that has the effect of “reducing consumer choice” without requiring any evidence that 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 a competitor’s conduct.

The clear limit on “consumer choice” claims contemplated by Wright’s Statement is another of its important benefits.

But Wright emphatically rejects proposals to limit Section 5 to mean only what the antitrust laws themselves mean. Section 5 does extend beyond the limits of the antitrust laws in encompassing conduct that is likely to result in harm to competition, although it hasn’t yet.

Because prospective enforcement of Section 5 against allegedly anticompetitive practices that may turn out not to be harmful imposes significant costs, Wright very nicely here also incorporates an error cost approach, requiring a showing of greater harm where the risk of harm is lower:

When the act or practice has not yet harmed competition, the Commission’s assessment must include both the magnitude and probability of competitive harm.  Where the probability of competitive harm is smaller, the Commission will not find an unfair method of competition without reason to believe the act or practice poses a risk of substantial harm.

In this category are the uncontroversial “invitation to collude” cases long agreed by just about everyone to be within the ambit of Section 5. But Commissioner Wright also suggests Section 5 is appropriate to prevent

the use by a firm of unfair methods of competition to acquire market power that does not yet rise to the level of monopoly power necessary for a violation of the Sherman Act.

This is somewhat more controversial as it contemplates (as the Statement’s illustrative examples make clear) deception that results in the acquisition of market power.

But most important to note is that, while deception was the basis for the Commission’s enforcement action in Rambus (later reversed by the D.C. Circuit), Commissioner Wright’s Statement would codify the important limitation (partly developed in Wright’s own work) on such cases that the deception must be the cause of an acquisition of market power.

Requirement #2: Absence of Cognizable Efficiencies

The real work in Wright’s Statement is done by the limitation on UMC enforcement in cases where the complained-of practice produces cognizable efficiencies. This is not a balancing test or a rule of reason. It is a safe harbor for cases where conduct is efficient, regardless of its effect on competition otherwise:

The Commission therefore creates a clear safe harbor that provides firms with certainty that their conduct can be challenged as an unfair method of competition only in the absence of efficiencies.

As noted at the outset, this is the most important and ambitious effort we know of to incorporate the error cost framework into FTC antitrust enforcement policy. This aspect of the Statement takes seriously the harm that can arise from the agency’s discretion, uncertainty over competitive effects (especially in “likely to cause” cases) and the imbalance of power and costs inherent in the FTC’s Part III adjudication to tip the scale back toward avoidance of erroneous over-enforcement.

Importantly, Commissioner Wright called out the last of these in his speech this morning, describing the fundamental imbalance that his Statement seeks to address:

The uncertainty surrounding the scope of Section 5 is exacerbated by the administrative procedures available to the Commission for litigating unfair methods claims. This combination gives the Commission the ability to, in some cases, take advantage of the uncertainty surrounding Section 5 by challenging conduct as an unfair method of competition and eliciting a settlement even though the conduct in question very likely would not violate the traditional federal antitrust laws. This is because firms typically will prefer to settle a Section 5 claim rather than going through lengthy and costly administrative litigation in which they are both shooting at a moving target and have the chips stacked against them. Such settlements only perpetuate the uncertainty that exists as a result of ambiguity associated with the Commission’s Section 5 authority by encouraging a process by which the contours of the Commission’s unfair methods of competition authority are drawn without any meaningful adversarial proceeding or substantive analysis of the Commission’s authority.

In essence, by removing the threat of Section 5 enforcement where efficiencies are cognizable, Wright’s Statement avoids the risk of Type I error, prioritizing the possible realization of efficiencies over possible anticompetitive harm with a bright line rule that avoids attempting to balance the one against the other:

The Commission employs an efficiencies screen to establish a test with clear and predictable results that prevents arbitrary enforcement of the agency’s unfair methods of competition authority, to focus the agency’s resources on conduct most likely to harm consumers, and to avoid deterring consumer welfare-enhancing business practices.

Moreover, the FTC bears the burden of demonstrating that its enforcement meets the efficiencies test, ensuring that the screen doesn’t become simply a rule of reason balancing:

The Commission bears the ultimate burden in establishing that the act or practice lacks cognizable efficiencies. Once a firm has offered initial evidence to substantiate its efficiency claims, the Commission must demonstrate why the efficiencies are not cognizable.

Fundamentally, as Commissioner Wright explained in his speech,

Anticompetitive conduct that lacks cognizable efficiencies is the most likely to harm consumers because it is without any redeeming consumer benefits. The efficiency screen also works to ensure that welfare-enhancing conduct is not inadvertently deterred…. The Supreme Court has long recognized that erroneous condemnation of procompetitive conduct significantly reduces consumer welfare by deterring investment in efficiency-enhancing business practices. To avoid deterring consumer welfare-enhancing conduct, my proposed Policy Statement limits the use of Section 5 to conduct that lacks cognizable efficiencies.

The Big Picture

Wright’s proposed Policy Statement is well thought out and much needed. It offers clear guidance for companies navigating the FTC’s murky Section 5 waters, and it offers clear, economically grounded limits on the FTC’s UMC enforcement authority. While preserving a scope of enforcement authority for Section 5 beyond the antitrust statutes (including against deceptive conduct that harms competition without any corresponding efficiency justification), it nevertheless reins in the most troubling abuses of that authority by clearly prohibiting the agency’s unprincipled enforcement actions in cases like N-Data, Google and Rambus, all of which failed to establish a connection between the complained-of conduct and harm to competition or else ignored clear efficiencies (particularly Google).

No doubt some agency watchers will criticize the Statement, labeling it reflexively deregulatory. But remember this isn’t being proposed in a vacuum. Commissioner Wright’s Statement defines only what should be a fairly narrow set of cases beyond the antitrust statutes’ reach. The Sherman Act doesn’t disappear because Section 5 is circumscribed, and the most recent controversial Section 5 cases could all theoretically have been plead solely as Section 2 cases (although they may well have failed).

What does change is the possibility of recourse to Section 5 as a means of avoiding the standards established by the courts in enforcing and interpreting the Sherman Act.

The Statement does not represent a restriction of antitrust enforcement authority unless you take as your starting point the agency’s recent unsupported and expansive interpretation of Section 5—a version of Section 5 that was never intended to, and doesn’t, exist. Wright’s Statement is, rather, a bulwark against unprincipled regulatory expansion: a sensible grounding of a statute with a checkered past and a penchant for mischief.

Chairman Leibowitz and Commissioner Rosch, in defending the use and expansion of Section 5, argued in Intel that it was necessary to circumvent judicial limitations on the enforcement of Section 2 aimed only at private plaintiffs (like, you know, demonstration of anticompetitive harm, basic pleading standards…)—basically the FTC’s “get out of Trinko free” card. According to Leibowitz, the Court’s economically rigorous, error-cost jurisprudence in cases like linkline, Trinko, Leegin, Twombly, and Brook Group were aimed at private plaintiffs, not agency actions:

But I also believe that the result, at least in the aggregate, is that some anticompetitive behavior is not being stopped—in part because the FTC and DOJ are saddled with court-based restrictions that are designed to circumscribe private litigation. Simply put, consumers can still suffer plenty of harm for reasons not encompassed by the Sherman Act as it is currently enforced in the federal courts.

The claim is meritless (as one of us (Manne) discussed here, for example). But it helps to make clear what the problem with current Section 5 standards are: There are no standards, only post hoc rationalizations to justify pursuing Section 2 cases without the cumbersome baggage of its jurisprudential limits.

The recent Supreme Court cases mentioned above are only the most recent examples of a decades-long jurisprudential trend incorporating modern economic thinking into antitrust law and recognizing the error-cost tradeoff. These cases have served to remove certain conduct (at least without appropriate evidence and analysis) from the reach of Section 2 in a measured, accretive fashion over the last 40 years or so. They have by no means made antitrust irrelevant, and the agencies and private plaintiffs alike bring and win cases all the time—and this doesn’t even measure the conduct that is deterred by the threat of enforcement.  The limits on Section 5 suggested by Commissioner Wright’s Statement are marginal limits on the scope of antitrust beyond the Sherman Act, Clayton Act and other statutes. There is nothing in the legislative history or plain language of Section 5 to suggest adopting a more expansive approach, in effect using it to undo what the courts have methodically done.

It is also worth noting that not only the antitrust laws, but also the the Unfair and Deceptive Acts and Practices (UDAP) prong of Section 5 exerts a regulatory constraint on business conduct, proscribing deception, for example, as a consumer protection matter—without having to prove the existence of market power or its abuse. This also forms a piece of the institutional backdrop against which Wright’s proposed Policy Statement must be adjudged.

Wright was a leading critic of the agency’s expansive use of Section 5 before he joined the Commission, both at Truth on the Market as well as in longer writing.  He has, correctly, seen it as a serious problem in need of remedying for quite some time. It is gratifying that Wright is continuing this work now that he is on the Commission, where he is no longer relegated merely to critiquing the agency but is in a position to try to transform it himself.

What remains needed is the political will to move this draft Policy Statement to adoption by the full Commission—something Chairman Ramirez is not likely to embrace without considerable pressure from Congress and/or the antitrust community. In the modest service of fulfilling this need, ICLE and TechFreedom intend to host later this year the first of what we hope will be several workshops on Commissioner Wright’s Statement and the broader topic of Section 5 enforcement reform. If the Commission won’t do it, the private sector will have to step in. For a taste of our perspective, check out the amicus brief we recently filed with FTC law scholars (Todd Zywicki, Paul Rubin and Gus Hurwitz) in the case of FTC v. Wyndham, which may be the first case to really test how the FTC uses is unfairness authority in consumer protection cases.

joshua-wright As Thom noted (here and here), Josh’s speech at the ABA Spring Meeting was fantastic.  In laying out his agenda at the FTC, Josh highlighted two areas on which he intends to focus: Section 5 and public restraints on trade.  These are important, even essential, areas, and Josh’s leadership here will be most welcome.

I’m especially encouraged by his comments on Section 5.  As readers of this blog know, Section 5 has been an issue near and dear to our hearts, and Josh’s intention to make it a centerpiece of his agenda at the Commission should come as no surprise. (There are too many posts on topic to link them individually here, but this link includes all our posts tagged with Section 5.  My own most recent discussion of the general topic (with Berin Szoka) is here).

Of perhaps greatest significance is this bit from Josh’s speech:

The Commission, however, has another choice available. It can and should issue a policy statement clearly setting forth its views on what constitutes an unfair method of competition as we have done with respect to our consumer protection mission…. I firmly believe this Commission is up to this important task and I look forward to working with my fellow Commissioners. In that spirit, I will soon informally and publicly distribute a proposed Section 5 Unfair Methods Policy Statement more fully articulating my views and perhaps even providing a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.

This is great news, and I eagerly look forward to Josh’s proposed Policy Statement.  As Berin and I noted (and as others, including most notably Bill Kovacic, have noted, as well), this kind of guidance is sorely lacking and much needed:

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.”

Not surprisingly, my views line up with Josh’s, and his speech is full of important comments on the current state of Section 5 enforcement at the Commission. Of note:

(1) Objective evaluation of the historical record reveals a remarkable and unfortunate gap between the theoretical promise of Section 5 as articulated by Congress and its application in practice by the Commission;

(2) There is little hope for Section 5 to play a productive role in antitrust enforcement unless the Commission articulates in a policy statement about precisely what constitutes an unfair method, how the agency will decide whether to bring unfair method claims, and a general framework including guiding and limiting principles for evaluating Section 5 cases.

* * *

What does a frank assessment of the 100 year record of Section 5 tell us about its contribution to the competition mission? Or as I might put it, has Section 5 lived up to its promise of nudging the FTC toward evidence-based antitrust? I believe the answer to that question is a resounding “no.” There is no shortage of scholars and commentators filling the empty vessel of Section 5 with visions or further promise or purpose of, for example, creating convergence among international jurisdictions, shifting the attention of competition policy from economic welfare to consumer choice, or incorporating behavioral economics into modern antitrust. History, however, tells us that Section 5 has fallen far short of its intended promise. Section 5 has not produced more than a handful of adjudicated decisions with any durable impact on antitrust doctrine or economic welfare.

* * *

After one hundred years the balance of evidence more than suggests the Commission’s use of Section 5 has done little to influence antitrust doctrine and less to inform judicial thinking or to provide guidance to the business community. This void is not a small matter for an administrative agency whose institutional blueprint contemplated such a significant role for Section 5. In my view, it is the Commission’s duty to provide that guidance. But beyond our obligation as responsible stewards of the FTC and consumers through execution of our competition mission, there is considerable risk to the agency of continuing on its current path of putting Section 5 to use without providing guidance. I simply do not believe that path is sustainable or sound competition policy. Section 5 will not live up to its promise of offering an analytically coherent contribution to competition policy if the Commission continues not to offer guidance.

Focusing in particular on the problem of the currently unfettered Section 5 and how it might sensibly be circumscribed, Josh makes some great points:

First, Section 5 should not be used to evade existing antitrust law. Where courts have proven competent to evaluate a particular type of business conduct under the traditional antitrust laws, there is little reason for the Commission to step in under its unfair methods authority. This is especially the case when Section 5 is used to take advantage of a weakened requirement to prove consumer harm in the rigorous manner required in, for example, Section 2 cases. Evading the consumer welfare proof requirements of existing Sherman Act jurisprudence reduces the credibility of the agency, runs the risk that procompetitive conduct will be condemned under Section 5, and circumvents the healthy development of Sherman Act jurisprudence in the courts.

* * *

A second potential limiting principle is a restriction that Section 5 unfair methods cases – as is the case with invitation to collude cases – do not involve plausible efficiency claims. Not only does the lack of efficiency justification reduce any potential collateral consequences associated with false positives, but determining the presence of absence of cognizable efficiencies also plays to a core institutional strength of the Commission. The Commission’s learning and expertise in this regard has already influenced the evolution of the Merger Guidelines, and is applied on a regular basis.

I have no doubt Josh can and will deliver on his promise of working with the other Commissioners to bring some much needed sense to this problematic aspect of the FTC’s authority. This is an enormously important issue, one in great need of attention, and I can think of no one better than Josh to lead the effort to address it.