Abstract

As bans on noncompete agreements (NCAs) become more frequent, commentators are increasingly concerned that costly trade secret litigation will rise. The logic underlying this claim is that bans on NCAs will spur worker mobility, resulting in more secret sharing, and thus opportunities for trade secret litigation. We test this claim leveraging the many state-level NCA bans for high- and low-wage workers, alongside data from Westlaw and the Courthouse News Service on trade secret filings. We find that the number of trade secret claims filed falls in the long run after NCAs are banned, even as mobility rises. This long-term drop in the number of filed trade secret claims is not driven by a decline in dual NCA and trade secret filings. It is also not driven by a decline in reliance on trade secrecy by firms. Instead, it appears firms rely more on trade secrets after NCAs are banned. Finally, we find that endorsing the inevitable disclosure doctrine causes a rise in both NCA and trade secret claims. Taken in sum, this evidence suggests that NCA and trade secret litigation are complements, and not substitute approaches to protecting valuable firm knowledge.

Read at SSRN.

To much fanfare and even more controversy, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) Antitrust Division jointly released new draft merger guidelines in July 2023. In December 2023, after concluding their review of comments on the draft, the agencies published the final guidelines. The new guidelines appear—in the eyes of many—to be an improvement over the draft document, although there remains considerable disagreement regarding how much improvement, and many of the document’s basic policy statements remain controversial.

On Feb. 26, 2024, the International Center for Law & Economics (ICLE) convened a distinguished panel of academics, practitioners, and former FTC commissioners to bring informed legal and economic perspectives to bear on the question of what the agencies delivered and how courts and antitrust practitioners might apply this guidance.

Panelists included Bruce Kobayashi, the Paige V. and Henry N. Butler Chair in Law and Economics at George Mason University’s Antonin Scalia Law School; Kristen Limarzi, a partner in the antitrust and competition practice group at Gibson Dunn; former FTC Commissioner and Acting Chair Maureen Ohlhausen, now a partner with Wilson Sonsini; Diana Moss, vice president and director of competition policy at the Progressive Policy Institute; and fellow former FTC Commissioner Noah Phillips, now co-chair of the antitrust practice at Cravath. ICLE Senior Scholar Dan Gilman served as moderator.

Video of the full event is embedded below.

Abstract

In this article, we examine one mechanism through which enforcement innovation occurs and is passed into practice at the U.S. antitrust agencies. Our main thesis is that agency economists are uniquely situated to produce, adapt, and disseminate new methodologies that improve enforcement accuracy because of the multiple and conflicting roles they play. Agency economists are trained in academic PhD programs to value methodology above application, and to read and publish in academic journals. They know how to narrow questions, so that they can be answered precisely, using theoretical and/or empirical models. But when they arrive at the agencies, these economists trained in academic PhD programs are thrust into decision-making roles where they must render judgments on messy, real-world cases, typically with imperfect knowledge, and often in conflict with agency attorneys, political appointees, and/or the economists and attorneys who appear on behalf of parties. How to manage this process in a way that produces growth (useful innovation) is a primary institutional challenge for the antitrust agencies.

We focus on the organizational structure of the U.S. antitrust agencies with an eye toward isolating the factors that encourage or discourage the development and application of useful, innovative economic tools. Specifically, we examine how the relationship between academia and the agencies and the dual responsibilities of research and casework serve to encourage what has become known as “enforcement R&D,” the development and application of new methodologies for screening and evaluating mergers, and for quantifying the expected harm to competition of various behaviors.

See at SSRN.

Abstract

The Global Antitrust Institute (“GAI”) provided comments to the U.S. Federal Trade Commission (“FTC”) in response to the FTC’s proposal to make significant amendments to the rules governing premerger notification under the Hart-Scott-Rodino Antitrust Improvements Act. The proposal will, if implemented, substantially increase burdens on all merging parties, regardless of whether the transaction reported poses an anticompetitive risk. In Section I we review the market for corporate control and the benefits it can have for effective firm management, allocative efficiency of economic resources, and consumer welfare. In Section II we explain how, contrary to the FTC’s view, the proposed changes will significantly increase the burden imposed on filing parties. This will impede the market for corporate control and consequently reduce productivity and inhibit innovation in other markets. In Section III we highlight potential conflicts between the proposed rule amendments and the Administrative Procedures Act.

Abstract

The economic theory of the firm teaches that vertical (and complementary goods) mergers differ fundamentally from horizontal mergers. Given incomplete contracting at arm’s length, improved coordination post-merger tends to increase competition and improve market outcomes in the case of vertical merger but tends to lessen competition and degrade market outcomes in the case of horizontal merger. Countervailing effects can of course reverse these tendencies, but rational merger analysis should take the fundamental differences of merger types into account.

The economic analysis of Section II.5 of the Draft Merger Guidelines (DMGs) conveys a rational—though incomplete—antitrust treatment of vertical mergers based on sound economic analysis. The one glaring omission in Section II.5 is the absence of any discussion of the elimination of double marginalization (EDM)—a feature typically inherent to vertical mergers and thus a procompetitive effect rather than an exogenous efficiency requiring separate evidence and analysis. EDM arises from improved coordination between the merging parties, with the salutary effect of increasing competition in the relevant market. EDM can manifest as improvements in the merged firm’s product price or non-price features. We urge the Agencies to add a discussion of EDM to Section II.5 of the DMGs.

Section II.6 of the DMGs, however, stands in stark contradiction to the economic analysis in Section II.5. The market-share threshold for a presumption of harm in Section II.6 has no support in either economics or legal precedent, and the “plus factors” when the presumption threshold is not triggered offer no reliable indication of competitive harm. We urge the Agencies to entirely eliminate Guideline 6 and the material in Section II.6 from the DMGs.

Abstract

The EC has proposed a regulatory framework for SEPs, the heart of which is the establishment of a regulatory authority—a “competence center”—charged with maintaining a registry of SEPs with detailed information drawn from required submissions by SEP holders and “administering a system for essentiality checks and processes for aggregate royalty determination and FRAND determination.” The proposal’s stated aim is to facilitate licensing negotiations between SEP holders and implementers, applying a balanced approach towards the bargaining parties. The approach is highly unbalanced, however. It would sharpen incentives for holdout by implementers and thereby substantially weaken SEP holders’ ability to appropriate the value of their IP. In particular, implementers would be empowered to substantially delay requests by SEP holders for injunctive relief against infringement in national courts of law. It is a truism that justice delayed is justice denied. Likewise, IP rights delayed are IP rights denied. Beyond delay, the Proposal would entirely bar the recovery of some losses from infringement in certain circumstances. As a result, the practical effect of the Proposal would be to induce licensing disputes where there would otherwise have been none, supplanting private bargaining with a less well-informed and inefficient administrative process that would materially depress incentives for innovation and standardization.

Abstract

Ronald Coase famously exposed the limitations of economic analyses that rely upon assumptions of frictionless markets. He highlighted the importance of including transaction costs in economic analyses and issued a challenge to economists to think seriously about how transaction costs impact economic systems. Harold Demsetz, extended Coase’s analysis to show how these costs alter the way firms price and market their products. Demsetz’ analysis underscored that the costs of providing a market sometimes exceed the benefits of creating one in the first place and examined conditions where transaction costs imply that zero amounts of explicit market pricing will be efficient.

This article focuses upon extending Demsetz’s insights concerning non-linear pricing contracts that seem not to “price” key side effects of the economic exchange. In particular, we analyze the welfare and output effects of two examples of such contracts commonly used by firms that are frequently subject to antitrust scrutiny: metered pricing and loyalty discounts. The analysis demonstrates how a firm’s choice to set prices for its products are influenced by transaction and information costs and examines whether changes in output caused by the use of these non-linear pricing schemes are positively correlated with changes in total and consumer welfare. The article then discusses conditions under which measuring output effects can reliably differentiate between welfare-increasing and welfare-reducing uses of non-linear pricing.

Abstract

The GAI filed this Comment with the Canadian Competition Bureau in response to the Bureau’s request for public feedback on draft Guidance on Wage-Fixing and No-Poaching Agreements. Such agreements will be subject to a new statute (subsection 45(1.1), Canadian Competition Act) taking effect June 23, 2023, prohibiting such agreements as per se offenses and making violations subject to criminal remedies. The GAI’s Comment commends the Bureau for seeking public comment prior to implementation and generally concurs with the basic approach taken by the Bureau. To further refine and improve the Bureau’s approach, the Comment identifies potential ambiguities in the Guidance. Ambiguity complicates compliance, since businesses are likely to avoid even procompetitive or competitively neutral conduct potentially exposed to challenge. Avoidance of lawful conduct by business firms due to uncertainty regarding applicable legal standards may inhibit competition and ultimately reduce economic performance and innovation. Per se condemnation and criminal remedies should be reserved for conduct always or almost always anticompetitive and lacking plausible procompetitive rationale. The GAI therefore asks the Bureau to take particular care in defining the types of agreements that may be subject to the new law. Principal areas of focus involve (1) transition provisions; (2) the scope of an exemption for agreements between “affiliates”; (3) the definition of what constitutes an “employment relationship,” a key term defining the scope of the new law; (4) the line between permissible information sharing and impermissible coordinated conduct, and (5) the proper interpretation of the “Ancillary Restraints Defense” that will be applicable.

Introduction

Since 1950, when Congress closed a loophole in Section 7 of the Clayton Act, the federal antitrust agencies have investigated actively, and prosecuted diligently, mergers the government believed could be anti-competitive. In 1976, the Clayton Act was amended to require notification of many mergers to the agencies before consummation, allowing the government to sue to stop these mergers before they occur. Throughout the decades, merger review has become an elaborate, expensive process consuming vast resources; involving the merging parties, their attorneys, various experts, and those in the government; and rarely ending in judicial proceedings. The large majority of mergers the government opposed were either abandoned or settled with agreements requiring asset divestitures before consummation.

Prospective merger screening at the federal antitrust agencies has evolved, using advances in theoretical and empirical economics, to deemphasize structural tests in favor of an effects-based analysis. The agencies’ merger guidelines have changed with this evolution in economic knowledge and agency practice. The goal of guideline changes has been to increase the predictability and accuracy of the agencies’ merger screening, thereby decreasing the social costs of merger enforcement.

Strident critics of modern antitrust law, including merger policy, hold each key competition job in the administration of Pres. Joseph R. Biden Jr., including heads of both the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice. President Biden recently decried modern antitrust law and policy as a 40-year “experiment failed.”To correct these “mistakes,” the antitrust agencies plan to replace the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines (already withdrawn by the FTC) with a new enforcement approach.

Periodic revisions to the merger guidelines ensure that they reflect current agency practice, recent legal developments, and sound antitrust policy. Given the current administration’s desire to alter significantly how the agencies analyze mergers, changes to the guidelines are necessary to ensure that they accurately describe the new agency practice. It is less clear, however, whether the planned changes to antitrust enforcement and guidelines will reflect current law or sound antitrust policy. Although the precise nature, including the operational details, of the new guidelines is unknown at this writing, the agencies not only have made their disdain for the guidelines of the past 40 years known, but also have expressed their affinity for the pre-1980 merger law that modern guidelines have repudiated. Both their request for comment on the guidelines, one year ago, and a recent speech from FTC Chair Lina Khan show this affinity. The request relied almost entirely on pre-1980 law; Chair Khan’s speech was even more explicit.

In September 2022 at Fordham Law School, FTC Chair Khan discussed her work on revising the merger guidelines and stressed “fidelity to the law” as a guiding principle. She claims that, starting in the 1980s, the antitrust agencies “began straying” by sidestepping “controlling precedent and the statutory text, including the 1950 amendments” through “administrative fiat.” The law to which Chair Khan refers relied on strict structural presumptions to proscribe mergers. As shown here, merger law then did much more, reflecting a populist animus against mergers. The result was an era when the only consistency in the cases, as Justice Potter Stewart famously remarked, was that “the Government always wins.” The case law was incoherent, illogical, and, most important, anti-consumer, condemning bigness for its own sake, even when the mergers were not especially large or in concentrated markets.

In her speech, Chair Khan also notes that a post–World War II FTC study showing growing industrial concentration was “cited extensively by Congress as evidence of the danger to the American economy in unchecked corporate expansions through mergers” and was a “major driver in the passage of the 1950 amendment.” David Cicilline, then Chairman of the House Judiciary Committee’s Antitrust, Commercial, and Administrative Law Subcommittee and a leading critic of recent antitrust enforcement, also cites the same historical evidence. Yet, the FTC study showing growing concentration as a result of merger activity was methodologically flawed and wrong on the facts. Scholars convincingly demonstrated the flaws in the study and its conclusions, and shortly thereafter the authors of this FTC study on concentration even conceded it was wrong. Concentration was in fact not growing, from mergers or otherwise, and may actually have been decreasing. The problems with this study were known shortly before Congress passed the 1950 amendments. The courts obviously were wrong to rely on this discredited study in the 1960s, and one is more puzzled still that the current administration finds it useful to approvingly cite a flawed and discredited study today.

Critics of antitrust enforcement since 1980 also cite newer studies that show increasing industry concentration and claim that this increase is associated with increases in aggregate markups and decreased competition. This evidence has the same flaws as the discredited evidence used to support the structural approach to merger control from the 1960s that the Biden administration admires. Industrial organization economists have repeatedly shown that reliable inferences about the competitive dynamics in antitrust markets cannot be derived from measures of concentration or correlations between concentration and aggregate markups. These advances in theoretical and empirical economics undermined the economic core of the structural approach and eventually caused the agencies under both political parties to abandon that approach to merger control. Surely, new evidence with the same flaws cannot support a return to structural antitrust.

To provide background on the issues and show the fallacy in returning to reliance on strong and simple structural presumptions, section II begins with a brief description of the economic evolution of the effects-based approach contained in the 2010 U.S. Horizontal Merger Guidelines and 2020 U.S. Vertical Merger Guidelines. Section III then examines the flawed economic evidence cited to support returning to strong structural presumptions. Section IV next analyzes why the statutory text of the 1950 amendment and the post-1950 merger law do not support turning the clock back to structural presumptions. Section V concludes.