There is a consensus in America that we need to control health care costs and improve the delivery of health care. After a long debate on health care reform and careful scrutiny of health care markets, there seems to be agreement that the unintegrated, “siloed approach” to health care is inefficient, costly, and contrary to the goal of improving care. But some antitrust enforcers — most notably the FTC — are standing in the way.

Read the full piece here.

An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

http://ssrn.com/abstract=2467939.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

Filed under: antitrust, contracts, doj, federal trade commission, intellectual property, licensing, markets, patent, SSRN, technology Tagged: ETSI, FRAND, high tech, IEEE, Joanna Tsai, joshua wright, licensing, Patent, patent holdup, SEP, SSO, standards

Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.

The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.

In a recent polemic, Microsoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).

Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”

In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.

But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.

Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:

(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.

It’s time to take a step back and consider the real issues at play.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”

Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:

The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:

Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.

The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.

Consider Amazon, which pre-loads no Google applications at all on its Kindle Fire and Fire Phone. Amazon’s version of Android uses Microsoft’s Bing as the default search engine; Nokia provides mapping services, and the app store is Amazon’s own.

Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.

It’s true that equipment manufacturers who choose the Android operating system have the option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.

But Google Android is far from the only Android experience.

Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.

Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:

The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.

Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.

Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.

But making Android competitive with its tightly controlled competitors requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS).  Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.

In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.

In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.

For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).

On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:

By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.

Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.

As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.

By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.

In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.

In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.

As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:

Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.

Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.

In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.

Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:

Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….

The FTC is also a loser because it ran a high profile two-year investigation but came up dry.

EU regulators, take note.

Filed under: antitrust, contracts, exclusionary conduct, google, law and economics, monopolization, technology, tying, tying Tagged: Android, antitrust, Apple, competition, google, Google Apps, iOS, Kindle Fire, microsoft, Samsung, tying, Windows Phone

While the Comcast/TWC merger is significant in size, it doesn’t give rise to any plausible theory of anticompetitive harm under modern antitrust analysis.

Comcast and TWC don’t compete directly for subscribers in any relevant market; in terms of concentration and horizontal effects, the transaction will neither reduce competition nor restrict consumer choice.

Critics repeatedly assert that the combined entity will gain bargaining leverage against content providers from the merger, resulting in lower content prices to programmers. But after the transaction, Comcast will serve fewer than 30 percent of total MVPD subscribers — a share insufficient to give it market power over sellers of video programming. Moreover, recent exponential growth in OVDs gives content providers even more ways to distribute their programming. Programmers with valuable content have significant bargaining power, and have been able to extract the prices to prove it.

The argument that the merger will increase Comcast’s incentive and ability to impair online video content or other edge providers is similarly without merit. On a national level, the combined firm would have only about 40 percent of broadband customers, at most. This leaves at least 60 percent of customers available to purchase content and support edge providers reaching minimum viable scale, even if Comcast were to attempt to foreclose access.

Some have also argued that because Comcast has a monopoly on access to its customers, transit providers are beholden to it. But edge providers can access Comcast’s network through multiple channels, undermining Comcast’s ability to deny access or degrade service to such providers.

Finally, critics have alleged that the vertically integrated Comcast may withhold its content from MVPDs or OVDs, or deny carriage to unaffiliated programming. But the transaction has no effect on Comcast’s share of national programming, and a trivial effect on its share of national distribution. Comcast already has no ownership interest in the overwhelming majority of content it distributes. This will not measurably change post-transaction.

At the same time, the transaction will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology. And bringing a more vertical structure to TWC will likely be beneficial, as well.

Download: Beneficence Is Beside the Point

Anyone interested in antitrust enforcement policy (and what TOTM reader isn’t?) should read FTC Commissioner Josh Wright’s interview in the latest issue of The Antitrust Source.  The extensive (22 page!) interview covers a number of topics and demonstrates the positive influence Commissioner Wright is having on antitrust enforcement and competition policy in general.

Commissioner Wright’s consistent concern with minimizing error costs will come as no surprise to TOTM regulars.  Here are a few related themes emphasized in the interview:

A commitment to evidence-based antitrust.

Asked about his prior writings on the superiority of “evidence-based” antitrust analysis, Commissioner Wright explains the concept as follows:

The central idea is to wherever possible shift away from casual empiricism and intuitions as the basis for decision-making and instead commit seriously to the decision-theoretic framework applied to minimize the costs of erroneous enforcement and policy decisions and powered by the best available theory and evidence.

This means, of course, that discrete enforcement decisions – should we bring a challenge or not? – should be based on the best available empirical evidence about the effects of the practice or transaction at issue. But it also encompasses a commitment to design institutions and structure liability rules on the basis of the best available evidence concerning a practice’s tendency to occasion procompetitive or anticompetitive effects. As Wright explains:

Evidence-based antitrust encompasses a commitment to using the best available economic theory and empirical evidence to make [a discrete enforcement] decision; but it also stands for a much broader commitment to structuring antitrust enforcement and policy decision-making. For example, evidence-based antitrust is a commitment that would require an enforcement agency seeking to design its policy with respect to a particular set of business arrangements – loyalty discounts, for example – to rely upon the existing theory and empirical evidence in calibrating that policy.

Of course, if the FTC is committed to evidence-based antitrust policy, then it will utilize its institutional advantages to enhance the empirical record on practices whose effects are unclear. Thus, Commissioner Wright lauds the FTC’s study of – rather than preemptive action against – patent assertion entities, calling it “precisely the type of activity that the FTC is well-suited to do.”

A commitment to evidence-based antitrust also means that the agency shouldn’t get ahead of itself in restricting conduct with known consumer benefits and only theoretical (i.e., not empirically established) harms. Accordingly, Commissioner Wright says he “divorced [him]self from a number of recommendations” in the FTC’s recent data broker report:

For the majority of these other recommendations [beyond basic disclosure requirements], I simply do not think that we have any evidence that the benefits from Congress adopting those recommendations would exceed the costs. … I would need to have some confidence based on evidence, especially about an area where evidence is scarce. I’m not comfortable relying on my priors about these activities, especially when confronted by something new that could be beneficial. … The danger would be that we recommend actions that either chill some of the beneficial activity the data brokers engage in or just impose compliance costs that we all recognize get passed on to consumers.

Similarly, Commissioner Wright has opposed “fencing-in” relief in consent decrees absent evidence that the practice being restricted threatens more harm than good. As an example, he points to the consent decree in the Graco case, which we discussed here:

Graco employed exclusive dealing contracts, but we did not allege that the exclusive dealing contracts violated the antitrust laws or Section 5. However, as fencing-in relief for the consummated merger, the consent included prohibitions on exclusive dealing and loyalty discounts despite there being no evidence that the firm had employed either of those tactics to anticompetitive ends. When an FTC settlement bans a form of discounting as standard injunctive relief in a merger case without convincing evidence that the discounts themselves were a competitive problem, it raises significant concerns.

A commitment to clear enforcement principles.

At several points throughout the interview, Commissioner Wright emphasizes the value of articulating clear principles that can guide business planners’ behavior. But he’s not calling for a bunch of ex ante liability rules. The old per se rule against minimum resale price maintenance, for example, was clear – and bad! Embracing overly broad liability rules for the sake of clarity is inconsistent with the evidence-based, decision-theoretic approach Commissioner Wright prefers. The clarity he is advocating, then, is clarity on broad principles that will govern enforcement decisions.  He thus reiterates his call for a formal policy statement defining the Commission’s authority to prosecute unfair methods of competition under Section 5 of the FTC Act.  (TOTM hosted a blog symposium on that topic last summer.)  Wright also suggests that the Commission should “synthesize and offer high-level principles that would provide additional guidance” on how the Commission will use its Section 5 authority to address data security matters.

Extension, not extraction, should be the touchstone for Section 2 liability.

When asked about his prior criticism of FTC actions based on alleged violations of licensing commitments to standards development organizations (e.g., N-Data), Commissioner Wright emphasized that there should be no Section 2 liability in such cases, or similar cases involving alleged patent hold-up, absent an extension of monopoly power. In other words, it is not enough to show that the alleged bad act resulted in higher prices; it must also have led to the creation, maintenance, or enhancement of monopoly power.  Wright explains:

The logic is relatively straightforward. The antitrust laws do not apply to all increases of price. The Sherman Act is not a price regulation statute. The antitrust laws govern the competitive process. The Supreme Court said in Trinko that a lawful monopolist is allowed to charge the monopoly price. In NYNEX, the Supreme Court held that even if that monopolist raises its price through bad conduct, so long as that bad conduct does not harm the competitive process, it does not violate the antitrust laws. The bad conduct may violate other laws. It may be a fraud problem, it might violate regulatory rules, it may violate all sorts of other areas of law. In the patent context, it might give rise to doctrines like equitable estoppel. But it is not an antitrust problem; antitrust cannot be the hammer for each and every one of the nails that implicate price changes.

…

In my view, the appropriate way to deal with patent holdup cases is to require what we require for all Section 2 cases. We do not need special antitrust rules for patent holdup; much less for patent assertion entities. The rule is simply that the plaintiff must demonstrate that the conduct results in the acquisition of market power, not merely the ability to extract existing monopoly rents. … That distinction between extracting lawfully acquired and existing monopoly rents and acquiring by unlawful conduct additional monopoly power is one that has run through Section 2 jurisprudence for quite some time.

In light of these remarks (which remind me of this excellent piece by Dennis Carlton and Ken Heyer), it is not surprising that Commissioner Wright also hopes and believes that the Roberts Court will overrule Jefferson Parish’s quasi-per se rule against tying. As Einer Elhauge has observed, that rule might make sense if the mere extraction of monopoly profits (via metering price discrimination or Loew’s-type bundling) was an “anticompetitive” effect of tying.  If, however, anticompetitive harm requires extension of monopoly power, as Wright contends, then a tie-in cannot be anticompetitive unless it results in substantial foreclosure of the tied product market, a necessary prerequisite for a tie-in to enhance market power in the tied or tying markets.  That means tying should not be evaluated under the quasi-per se rule but should instead be subject to a rule of reason similar to that governing exclusive dealing (i.e., some sort of “qualitative foreclosure” approach).  (I explain this point in great detail here.)

Optimal does not mean perfect.

Commissioner Wright makes this point in response to a question about whether the government should encourage “standards development organizations to provide greater clarity to their intellectual property policies to reduce the likelihood of holdup or other concerns.”  While Wright acknowledges that “more complete, more precise contracts” could limit the problem of patent holdup, he observes that there is a cost to greater precision and completeness and that the parties to these contracts already have an incentive to put the optimal amount of effort into minimizing the cost of holdup. He explains:

[M]inimizing the probability of holdup does not mean that it is zero. Holdup can happen. It will happen. It will be observed in the wild from time to time, and there is again an important question about whether antitrust has any role to play there. My answer to that question is yes in the case of deception that results in market power. Otherwise, we ought to leave the governance of what amount to contracts between SSO and their members to contract law and in some cases to patent doctrines like equitable estoppel that can be helpful in governing holdup.

…[I]t is quite an odd thing for an agency to be going out and giving advice to sophisticated parties on how to design their contracts. Perhaps I would be more comfortable if there were convincing and systematic evidence that the contracts were the result of market failure. But there is not such evidence.

Consumer welfare is the touchstone.

When asked whether “there [are] circumstances where non-competition concerns, such as privacy, should play a role in merger analysis,” Commissioner Wright is unwavering:

No. I think that there is a great danger when we allow competition law to be unmoored from its relatively narrow focus upon consumer welfare. It is the connection between the law and consumer welfare that allows antitrust to harness the power of economic theory and empirical methodologies. All of the gains that antitrust law and policy as a body have earned over the past fifty or sixty years have been from becoming more closely tethered to industrial organization economics, more closely integrating economic thought in the law, and in agency discretion and decision-making. I think that the tight link between the consumer welfare standard and antitrust law is what has allowed such remarkable improvements in what effectively amounts to a body of common law.

Calls to incorporate non-economic concerns into antitrust analysis, I think, threaten to undo some, if not all, of that progress. Antitrust law and enforcement in the United States has some experience with trying to incorporate various non-economic concerns, including the welfare of small dealers and worthy men and so forth. The results of the experiment were not good for consumers and did not generate sound antitrust policy. It is widely understood and recognized why that is the case.

***

Those are just some highlights. There’s lots more in the interview—in particular, some good stuff on the role of efficiencies in FTC investigations, the diverging standards for the FTC and DOJ to obtain injunctions against unconsummated mergers, and the proper way to analyze reverse payment settlements.  Do read the whole thing.  If you’re like me, it may make you feel a little more affinity for Mitch McConnell.

Filed under: antitrust, error costs, federal trade commission, section 5

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials. RSVP here.

Commissioner Wright will present a keynote address discussing his dissent in Apple and his approach to applying economics in consumer protection cases generally.

Geoffrey Manne, Executive Director of ICLE, will briefly discuss his recent paper on the role of economics in the FTC’s consumer protection enforcement. Berin Szoka, TechFreedom President, will moderate a panel discussion featuring:

• Martin Gaynor, Director, FTC Bureau of Economics
• David Balto, Fmr. Deputy Assistant Director for Policy & Coordination, FTC Bureau of Competition
• Howard Beales, Fmr. Director, FTC Bureau of Consumer Protection
• James Cooper, Fmr. Acting Director & Fmr. Deputy Director, FTC Office of Policy Planning
• Pauline Ippolito, Fmr. Acting Director & Fmr. Deputy Director, FTC Bureau of Economics

Background

The FTC recently issued a complaint and consent order against Apple, alleging its in-app purchasing design doesn’t meet the Commission’s standards of fairness. The action and resulting settlement drew a forceful dissent from Commissioner Wright, and sparked a discussion among the Commissioners about balancing economic harms and benefits in Section 5 unfairness jurisprudence. More recently, the FTC brought a similar action against Amazon, which is now pending in federal district court because Amazon refused to settle.

Event Info

The “FTC: Technology and Reform” project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology. The Project’s initial report, released in December 2013, identified critical questions facing the agency, Congress, and the courts about the FTC’s future, and proposed a framework for addressing them.

The event will be live streamed here beginning at 12:15pm. Join the conversation on Twitter with the #FTCReform hashtag.

When:

Thursday, July 31
11:45 am – 12:15 pm — Lunch and registration
12:15 pm – 2:00 pm — Keynote address, paper presentation & panel discussion

Where:

Woolly Mammoth Theatre Company – Rehearsal Hall
641 D St NW
Washington, DC 20004

Questions? – Email [email protected]. RSVP here.

See ICLE’s and TechFreedom’s other work on FTC reform, including:

• Geoffrey Manne’s Congressional testimony on the the FTC@100
• Op-ed by Berin Szoka and Geoffrey Manne, “The Second Century of the Federal Trade Commission”
• Two posts by Geoffrey Manne on the FTC’s Amazon Complaint, here and here.

About The International Center for Law and Economics:

The International Center for Law and Economics is a non-profit, non-partisan research center aimed at fostering rigorous policy analysis and evidence-based regulation.

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.

Filed under: administrative, announcements, antitrust, consumer protection, cost-benefit analysis, error costs, federal trade commission, international center for law & economics, law and economics, regulation, section 5, technology Tagged: Amazon, Apple, consumer protection, Federal Trade Commission, ftc, icle, section 5, techfreedom, Unfairness

Geoffrey A. Manne joined Capitol Forum Senior Correspondent Jonathan Rubin to discuss why he believes the Comcast-Time Warner cable merger will not give rise to anti-competitive harm under modern theories of antitrust enforcement. A transcript of the event can be found here.

The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why “net neutrality” regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See our previous post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

Read the full piece here.

Last Monday, a group of nineteen scholars of antitrust law and economics, including yours truly, urged the U.S. Court of Appeals for the Eleventh Circuit to reverse the Federal Trade Commission’s recent McWane ruling.

McWane, the largest seller of domestically produced iron pipe fittings (DIPF), would sell its products only to distributors that “fully supported” its fittings by carrying them exclusively.  There were two exceptions: where McWane products were not readily available, and where the distributor purchased a McWane rival’s pipe along with its fittings.  A majority of the FTC ruled that McWane’s policy constituted illegal exclusive dealing.

Commissioner Josh Wright agreed that the policy amounted to exclusive dealing, but he concluded that complaint counsel had failed to prove that the exclusive dealing constituted unreasonably exclusionary conduct in violation of Sherman Act Section 2.  Commissioner Wright emphasized that complaint counsel had produced no direct evidence of anticompetitive harm (i.e., an actual increase in prices or decrease in output), even though McWane’s conduct had already run its course.  Indeed, the direct evidence suggested an absence of anticompetitive effect, as McWane’s chief rival, Star, grew in market share at exactly the same rate during and after the time of McWane’s exclusive dealing.

Instead of focusing on direct evidence of competitive effect, complaint counsel pointed to a theoretical anticompetitive harm: that McWane’s exclusive dealing may have usurped so many sales from Star that Star could not achieve minimum efficient scale.  The only evidence as to what constitutes minimum efficient scale in the industry, though, was Star’s self-serving statement that it would have had lower average costs had it operated at a scale sufficient to warrant ownership of its own foundry.  As Commissioner Wright observed, evidence in the record showed that other pipe fitting producers had successfully entered the market and grown market share substantially without owning their own foundry.  Thus, actual market experience seemed to undermine Star’s self-serving testimony.

Commissioner Wright also observed that complaint counsel produced no evidence showing what percentage of McWane’s sales of DIPF might have gone to other sellers absent McWane’s exclusive dealing policy.  Only those “contestable” sales – not all of McWane’s sales to distributors subject to the full support policy – should be deemed foreclosed by McWane’s exclusive dealing.  Complaint counsel also failed to quantify sales made to McWane’s rivals under the generous exceptions to its policy.  These deficiencies prevented complaint counsel from adequately establishing the degree of market foreclosure caused by McWane’s policy – the first (but not last!) step in establishing the alleged anticompetitive harm.

In our amicus brief, we antitrust scholars take Commissioner Wright’s side on these matters.  We also observe that the Commission failed to account for an important procompetitive benefit of McWane’s policy:  it prevented rival DIPF sellers from “cherry-picking” the most popular, highest margin fittings and selling only those at prices that could be lower than McWane’s because the cherry-pickers didn’t bear the costs of producing the full line of fittings.  Such cherry-picking is a form of free-riding because every producer’s fittings are more highly valued if a full line is available.  McWane’s policy prevented the sort of free-riding that would have made its production of a full line uneconomical.

In short, the FTC’s decision made it far too easy to successfully challenge exclusive dealing arrangements, which are usually procompetitive, and calls into question all sorts of procompetitive full-line forcing arrangements.  Hopefully, the Eleventh Circuit will correct the Commission’s mistake.

Other professors signing the brief include:

• Tom Arthur, Emory Law
• Roger Blair, Florida Business
• Don Boudreaux, George Mason Economics (and Café Hayek)
• Henry Butler, George Mason Law
• Dan Crane, Michigan Law (and occasional TOTM contributor)
• Richard Epstein, NYU and Chicago Law
• Ken Elzinga, Virginia Economics
• Damien Geradin, George Mason Law
• Gus Hurwitz, Nebraska Law (and TOTM)
• Keith Hylton, Boston University Law
• Geoff Manne, International Center for Law and Economics (and TOTM)
• Fred McChesney, Miami Law
• Tom Morgan, George Washington Law
• Barack Orbach, Arizona Law
• Bill Page, Florida Law
• Paul Rubin, Emory Economics (and TOTM)
• Mike Sykuta, Missouri Economics (and TOTM)
• Todd Zywicki, George Mason Law (and Volokh Conspiracy)

The brief’s “Summary of Argument” follows the jump.

Unlike in a pre-merger investigation, the Federal Trade Commission (“FTC”) did not need to rely on indirect evidence related to market structure to predict the competitive effect of the conduct challenged in this case.  McWane’s Full Support Program, which gave rise to the Commission’s exclusive dealing claim, was fully operational—and had terminated—prior to the proceedings below.  Complaint Counsel thus had access to data on actual market effects.

But Complaint Counsel did not base its case on such effects, some of which suggested an absence of anticompetitive harm.  Instead, Complaint Counsel theorized that McWane’s exclusive dealing could have anticompetitively “raised rivals’ costs” by holding them below minimum efficient scale, and it relied entirely on a self-serving statement by McWane’s chief rival to establish what constitutes such scale in the industry at issue.  In addition, Complaint Counsel failed to establish the extent of market foreclosure actually occasioned by McWane’s Full Support Program, did not assess the degree to which the program’s significant exceptions mitigated its anticompetitive potential, and virtually ignored a compelling procompetitive rationale for McWane’s exclusive dealing.  In short, Complaint Counsel presented only weak and incomplete indirect evidence in an attempt to prove anticompetitive harm from an exclusive dealing arrangement that had produced actual effects tending to disprove such harm.  Sustaining a liability judgment based on so thin a reed would substantially ease the government’s burden of proof in exclusive dealing cases.

Exclusive dealing liability should not be so easy to establish.  Economics has taught that although exclusive dealing may sometimes occasion anticompetitive harm, several prerequisites must be in place before such harm can occur.  Moreover, exclusive dealing can achieve a number of procompetitive benefits and is quite common in highly competitive markets.  The published empirical evidence suggests that most instances of exclusive dealing are procompetitive rather than anticompetitive.  Antitrust tribunals should therefore take care not to impose liability too easily.

Supreme Court precedents, reflecting economic learning on exclusive dealing, have evolved to make liability more difficult to establish.  Whereas exclusive dealing was originally condemned almost per se, Standard Oil of California v. United States, 337 U.S. 293 (1949) (hereinafter “Standard Stations”), the Supreme Court eventually instructed that a reviewing court should make a fuller inquiry into the competitive effect of the challenged exclusive dealing activity.  See Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 329 (1961).  In In re Beltone Electronics, 100 F.T.C. 68 (1982), the FTC followed Tampa Electric’s instruction and embraced an economically informed method of analyzing exclusive dealing.

The decision on appeal departs from Beltone—which the FTC never even cited—by imposing liability for exclusive dealing without an adequate showing of likely competitive harm.  If allowed to stand, the judgment below could condemn or chill a wide range of beneficial exclusive dealing arrangements.  We therefore urge reversal to avoid creating new and unwelcome antitrust enforcement risks.

Filed under: antitrust, exclusionary conduct, exclusive dealing, federal trade commission, law and economics, monopolization