Archives For Wyndham

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.