Commissioner Wright makes a powerful and important case in dissenting from the FTC’s 2-1 (Commissioner Ohlhausen was recused from the matter) decision imposing conditions on Nielsen’s acquisition of Arbitron.

Read the full piece here.

I’d like to thank Geoff and Thom for organizing this symposium and creating a forum for an open and frank exchange of ideas about the FTC’s unfair methods of competition authority under Section 5.  In offering my own views in a concrete proposed Policy Statement and speech earlier this summer, I hoped to encourage just such a discussion about how the Commission can define its authority to prosecute unfair methods of competition in a way that both strengthens the agency’s ability to target anticompetitive conduct and provides much needed guidance to the business community.  During the course of this symposium, I have enjoyed reading the many thoughtful posts providing feedback on my specific proposal, as well as offering other views on how guidance and limits can be imposed on the Commission’s unfair methods of competition authority.  Through this marketplace of ideas, I believe the Commission can develop a consensus position and finally accomplish the long overdue task of articulating its views on the application of the agency’s signature competition statute.  As this symposium comes to a close, I’d like to make a couple quick observations and respond to a few specific comments about my proposal.

Read the full piece here. 

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

We’ve had a great day considering the possibility, and potential contours, of guidelines for implementing the FTC’s “unfair methods of competition” (UMC) authority.  Many thanks to our invited participants and to TOTM readers who took the time to follow today’s posts.  There’s lots of great stuff here, so be sure to read anything you missed.  And please continue to comment on posts.  A great thing about a blog symposium is that the discussion need not end immediately.  We hope to continue the conversation over the next few days.

I’m tempted to make some observations about general themes, points of (near) consensus, open questions, etc., but I won’t do that because we’re not quite finished.  We’re expecting to receive an additional post or two tomorrow, and to hear a response from Commissioner Josh Wright.  We hope you’ll join us tomorrow for final posts and Commissioner Wright’s response.

Here are links to the posts so far:

• David Balto, Law Offices of David Balto:  Some Quick Observations on the Drive for UMC Policy Guidelines and Economic Evidence and Section 5
• Terry Calvani & Angela Diveley, Freshfields:  Injury to Competition and Efficiencies in Section 5 Claims
• James Cooper, GMU Law & Economics Center:  The Limits of Section 5’s Scope Beyond the Sherman Act and A Sensible Limit to the FTC’s Section 5 Authority
• Dan Crane, Michigan Law:  Section 5 and Principles of Self-Restraint
• Gus Hurwitz, Nebraska Law:  The Application of Chevron to Section 5 and A Policy Statement Is Not Enough
• Thom Lambert, Missouri Law:  Guidelines for the FTC’s UMC Authority: What’s Clear and What’s Not?
• Marina Lao, Seton Hall Law:  The FTC’s Unfair Methods of Competition Authority
• Geoffrey Manne, Lewis & Clark Law/ICLE:  The Importance of Sensible Guidance for UMC Enforcement
• Joe Sims, Jones Day:  First Principles of Section 5 Authority
• Tim Wu, Columbia Law:  Section 5 Guidelines Would Make the FTC Stronger and Better

Filed under: announcements, antitrust, federal trade commission, section 5 Tagged: Competition law, Efficiencies, Federal Trade Commission, ftc, Harm to Competition, UMC

Gus Hurwitz is Assistant Professor of Law at University of Nebraska College of Law

Administrative law really is a strange beast. My last post explained this a bit, in the context of Chevron. In this post, I want to make this point in another context, explaining how utterly useless a policy statement can be. Our discussion today has focused on what should go into a policy statement – there seems to be general consensus that one is a good idea. But I’m not sure that we have a good understanding of how little certainty a policy statement offers.

Administrative Stare Decisis?

I alluded in my previous post to the absence of stare decisis in the administrative context. This is one of the greatest differences between judicial and administrative rulemaking: agencies are not bound by either prior judicial interpretations of their statutes, or even by their own prior interpretations. These conclusions follow from relatively recent opinions – Brand-X in 2005 and Fox I in 2007 – and have broad implications for the relationship between courts and agencies.

In Brand-X, the Court explained that a “court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” This conclusion follows from a direct application of Chevron: courts are responsible for determining whether a statute is ambiguous; agencies are responsible for determining the (reasonable) meaning of a statute that is ambiguous.

Not only are agencies not bound by a court’s prior interpretations of an ambiguous statute – they’re not even bound by their own prior interpretations!

In Fox I, the Court held that an agency’s own interpretation of an ambiguous statute impose no special obligations should the agency subsequently change its interpretation.[1] It may be necessary to acknowledge the prior policy; and factual findings upon which the new policy is based that contradict findings upon which the prior policy was based may need to be explained.[2] But where a statute may be interpreted in multiple ways – that is, in any case where the statute is ambiguous – Congress, and by extension its agencies, is free to choose between those alternative interpretations. The fact that an agency previously adopted one interpretation does not necessarily render other possible interpretations any less reasonable; the mere fact that one was previously adopted therefore, on its own, cannot act as a bar to subsequent adoption of a competing interpretation.

What Does This Mean for Policy Statements?

In a contentious policy environment – that is, one where the prevailing understanding of an ambiguous law changes with the consensus of a three-Commissioner majority – policy statements are worth next to nothing. Generally, the value of a policy statement is explaining to a court the agency’s rationale for its preferred construction of an ambiguous statute. Absent such an explanation, a court is likely to find that the construction was not sufficiently reasoned to merit deference. That is: a policy statement makes it easier for an agency to assert a given construction of a statute in litigation.

But a policy statement isn’t necessary to make that assertion, or for an agency to receive deference. Absent a policy statement, the agency needs to demonstrate to the court that its interpretation of the statute is sufficiently reasoned (and not merely a strategic interpretation adopted for the purposes of the present litigation).

And, more important, a policy statement in no way prevents an agency from changing its interpretation. Fox I makes clear that an agency is free to change its interpretations of a given statute. Prior interpretations – including prior policy statements – are not a bar to such changes. Prior interpretations also, therefore, offer little assurance to parties subject to any given interpretation.

Are Policy Statements entirely Useless?

Policy statements may not be entirely useless. The likely front on which to challenge an unexpected change agency interpretation of its statute is on Due Process or Notice grounds. The existence of a policy statement may make it easier for a party to argue that a changed interpretation runs afoul of Due Process or Notice requirements. See, e.g., Fox II.

So there is some hope that a policy statement would be useful. But, in the context of Section 5 UMC claims, I’m not sure how much comfort this really affords. Regulatory takings jurisprudence gives agencies broad power to seemingly-contravene Due Process and Notice expectations. This is largely because of the nature of relief available to the FTC: injunctive relief, such as barring certain business practices, even if it results in real economic losses, is likely to survive a regulatory takings challenge, and therefore also a Due Process challenge.  Generally, the Due Process and Notice lines of argument are best suited against fines and similar retrospective remedies; they offer little comfort against prospective remedies like injunctions.

Conclusion

I’ll conclude the same way that I did my previous post, with what I believe is the most important takeaway from this post: however we proceed, we must do so with an understanding of both antitrust and administrative law. Administrative law is the unique, beautiful, and scary beast that governs the FTC – those who fail to respect its nuances do so at their own peril.

Filed under: antitrust, federal trade commission, section 5, UMC symposium Tagged: Chevron, Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., Congress, Due Process, Federal Communications Commission, Federal Trade Commission, ftc, United States Congress

Gus Hurwitz is Assistant Professor of Law at University of Nebraska College of Law

Introduction

This post is based upon an in-progress article that explores the applicability of Chevron deference to FTC interpretations of Section 5’s proscription of unfair methods of competition. ( I am happy to circulate a draft of this article to anyone who would like to offer substantive feedback.) The article is prompted by the near-universal belief in the antitrust bar – held by both academics and practitioners – that the FTC is not entitled to Chevron deference.

In my limited space here, I hope to do three things. First, since many readers may not be familiar with Chevron deference, I explain very briefly what it is. Second, I explain why Chevron deference is relevant to Section 5 and to UMC in particular. And third, I debunk three of the most pervasive myths about why the FTC would not receive Chevron deference.

Regardless one’s priors, understanding the relationship between Section 5 and Chevron is essential to understanding the future of FTC-based competition policy. The past 30 years of competition policy debates have addressed the courts as its main audience. The new front – which neither the antitrust hawks or doves has significant experience with – is administrative. Administrative law is very different from the judicially-defined, stare decisis–restrained, common-law venue in which we are all used to playing.

Chevron

Chevron deference is used where a statute enforced by an administrative agency involves an ambiguous legal standard. In such cases, it is unclear whether such ambiguity should be resolved by the courts or by the agency. In its 1984 Chevron opinion, the Court made clear – for various reasons that are hotly debated to this day – that courts should defer to agency interpretations of such ambiguous statutes, provided that the interpretation is permissible within the language of the statute.

It is requisite that any discussion of Chevron cite to the opinion’s famous language:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute. Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 842-43 (1984)

This standard is important to the FTC because Section 5 was deliberately designed to be an ambiguous statute (this is made clear in the legislative history, and has been affirmed consistently by the Court). In the context of UMC, each of “unfair,” “method,” and “competition” bears some modicum of ambiguity – “unfair,” in particular drips with it.

Chevron’s relevance to Section 5

This ambiguity has not been an issue for the past 30 years or so, because the FTC has restrained itself to an interpretation of UMC that is concurrent with the judicially-defined antitrust laws (viz., the Sherman and Clayton Acts). But as the fact of this symposium reflects, recent years have seen increasing pressure for the FTC to embrace a more expansive understanding of its UMC authority under Section 5.

What happens when it does this? What happens, for example, when the FTC asserts that “unfair” embraces more than mere aggregate consumer welfare, but extends to distributional effects as well. There is a not-insane argument that some decreases in total welfare is an acceptable cost to secure greater distributional “fairness.” If the courts afford the Commission Chevron deference, the answer is simple: the Commission wins.

Debunking the myth that Chevron does not apply to Section 5

There is a pervasive belief that Chevron does not apply to Section 5. As a result, antitrust scholarship has largely addressed the courts as its audience, framing debates about Section 5 in the same language and theory as has been embraced by the courts in the context of the Sherman Act. That is, discussions have largely been framed in post-Antitrust Paradox consumer welfare understandings of antitrust law.

This view was clear in the FTC’s 2008 workshop on Section 5 of the FTC Act as a Competition Statute. It has also been captured extensively in Dan Crane’s wonderful work on the FTC as an institution. Anecdotally, as I have wondered about this issue over the past several years, I have encountered many antitrust scholars and practitioners who have assured me that Chevron does not apply to Section 5; and I have encountered none who have believed that it does.

A number of reasons have been offered to explain why Chevron does not apply to Section 5. In the remained of this post, I will debunk the three most pervasive explanations offered for this: that the FTC doesn’t have substantive rulemaking authority, that deference doesn’t apply to statutes that are enforced by multiple agencies (e.g., the FTC and DOJ both enforcing the antitrust laws), and that Indiana Federation of Dentists, 476 U.S. 447 (1986) (the Court’s most recent Section 5 UMC case), provides that Section 5 UMC cases are reviewed de novo by the courts.

Myth #1: FTC doesn’t have rulemaking authority

It is widely believed that the FTC doesn’t have substantive UMC rulemaking authority; and folks seem to think that such authority is required for an agency to get Chevron deference. Both of these are beliefs are wrong.

The confusion over the extent of the FTC’s rulemaking authority is somewhat understandable – it has been the subject of much controversy and judicial and Congressional debate for much of the Commission’s existence. This debate has been especially muddled by Congress’s disparate treatment of UMC and UDAP (unfair or deceptive act or practices – a separate offence proscribed by Section 5).

But there really is no question that the FTC has substantive UMC rulemaking authority under Section 6(g). The Supreme Court held so much in National Petroleum Refiners, 482 F.2d 672 (1973) – one of the seminal cases in the administrative law canon. While the FTC Act has been amended several times since National Petroleum Refiners (most notably in 1975, 1980, and 1994), and the Commissions UDAP rulemaking power has been an explicit focus of several of these amendments, none of them has affected the Commission’s UMC rulemaking authority. To the contrary, the amendments and related legislative history expressly preserve the Commission’s UMC rulemaking authority as it existed in 1973.

(The 1975 amendments notes that “The preceding sentence shall not affect any authority of the commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” The 1980 Conference report notes that the 1975 amendments “specifically addressed the Commission’s rulemaking authority over ‘unfair or deceptive acts or practices,” and that they expressly declaimed any effect on the Commission’s authority with respect to unfair methods of competition. And the 1994 amendments focused exclusively on unfair acts or practices – omitting both deceptive acts or practices and unfair methods of competition.)

What’s more, substantive rulemaking authority is not the necessary condition for Chevron deference to apply. The necessary condition is that the agency be able to make rules or establish legal norms carrying the force of law. Such rules can be made either through rulemaking or adjudication (and possibly even through other Congressionally-intended mechanisms). See Mead, 533 U.S. 218, 234-35 (2001). There is little, if any, serious question that the FTC was created precisely for this purpose and, to this day, has such power.

Myth #2: Concurrent antitrust jurisdiction means no deference

A second common explanation for why the FTC does not receive the benefit of Chevron deference is that such deference does not extend to statutes enforced by multiple agencies, and that the antitrust laws are enforced by both the DOJ and FTC. Again, this is a misunderstanding of both FTC and administrative law.

On the administrative law front, the question of how concurrent jurisdiction affects deference is handled as a threshold question to be answered by Congressional intent. (For the admin-law geeks among us, this is a step-zero question.) It is possible that Congress intended either, neither, or both agencies with concurrent jurisdiction to be given deference. Whatever Congress intended, is what controls – not a mythical rule that concurrent jurisdiction negates deference.

But this explanation suffers a more basic flaw: the only reason that the FTC and DOJ have concurrent jurisdiction over the antitrust laws is because the FTC has interpreted Section 5 to be concurrent with the antitrust laws enforced by the DOJ. Section 5 (and the FTC itself) was created precisely to be broader than the antitrust laws – and nothing in Section 5 even references the “antitrust laws.” Section 5 may be coextensive with the DOJ-enforced antitrust laws – but only because it encompasses and is broader than them. The FTC does not share jurisdiction over that part of Section 5 that is broader than those laws that the DOJ enforces.

Myth #3: Indiana Federation of Dentists holds Section 5 UMC cases are reviewed de novo

The final myth that I will consider is that Indiana Federation of Dentists requires courts to conduct de novo review of FTC legal determinations under Section 5. This explanation really is quite fascinating as a demonstration of how myths can propagate through the bar – and the importance of interfacing with experts from other specialty areas of the law.

The typically-cited passage from Indiana Federation of Dentists explains that:

The legal issues presented — that is, the identification of governing legal standards and their application to the facts found — are, by contrast, for the courts to resolve, although even in considering such issues the courts are to give some deference to the Commission’s informed judgment that a particular commercial practice is to be condemned as “unfair.”

This language has been cited as requiring do novo review of all legal questions, including the legal meaning of Section 5. Dan Crane has called this an “odd standard,” noting that ordinarily “this is technically a question of Chevron deference, although the courts have not articulated it that way in the antitrust space.” Indeed, it seems remarkable that Indiana Federation of Dentists (decided in 1986) does not even mention Chevron (decided in 1984) – a fact that has led antitrust commentators to believe “One cannot explain judicial posture in the antitrust arena in Chevron terms.”

But this is a misreading of Indiana Federation of Dentists, which is in fact entirely in line with Chevron; and it is a misunderstanding of Chevron’s history. First, it is unsurprising that Indiana Federation of Dentists did not cite to Chevron. The Indiana Federation of Dentists petitioned for cert from a 7^th Circuit that had been argued before Chevron was decided, and the Commission was arguing for an uncontroversial interpretation of Section 5 as applying Section 1 of the Sherman Act. The Commission had never structured its case to seek deference, and before the Supreme Court it had no need to argue for any deference.

Moreover, it took several years for the importance of Chevron to become understood, and to filter its way into judicial review of agency statutory interpretation. Over the next several years, the Circuit Courts regularly used Indiana Federation of Dentists to explain the standard of review for various agencies’ interpretations of their organic statutes (including, e.g., HHS, INS Labor, and OSHA). Importantly, these cases recognized that there was some confusion as to the changing standard of review; framed their analysis in terms of Skidmore (the precursor Chevron in this line of cases); and largely reached Chevron-like conclusions, despite Indiana Federation of Dentists’s suggestion of a lower level of deference. Today, Chevron, not Indiana Federation of Dentists, is the law of the land – at least, for every regulatory agency other than the FTC.

Indeed, a close reading of Indiana Federation of Dentists finds that it is in accord with Chevron. The continuation of the paragraph quoted above explains that:

The standard of “unfairness” under the FTC Act is, by necessity, an elusive one, encompassing 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. Once the Commission has chosen a particular legal rationale for holding a practice to be unfair, however, familiar principles of administrative law dictate that its decision must stand or fall on that basis, and a reviewing court may not consider other reasons why the practice might be deemed unfair. In the case now before us, the sole basis of the FTC’s finding of an unfair method of competition was the Commission’s conclusion that the [alleged conduct] was an unreasonable and conspiratorial restraint of trade in violation of § 1 of the Sherman Act. Accordingly, the legal question before us is whether the Commission’s factual findings, if supported by evidence, make out a violation of Sherman Act § 1. (emphasis added)

This language critically alters the paragraph’s initial proposition that the legal issues are for determination by the courts. Rather, the Court recognizes that Section 5 is inherently ambiguous. It is therefore to the Commission to choose the legal standard under which that conduct will be reviewed – “a reviewing court may not consider other reasons why the practice might be deemed unfair.”

This is precisely the standard established by Chevron: first, the courts determine whether the statute is ambiguous and, if it is not, the court’s reading of the statute is binding; but if it is ambiguous, the court defers to the agency’s construction. Part of why Chevron is a difficult test is that both parts of this analysis do, in fact, present legal questions for the court. The first step is purely legal, with the court determining on its own whether the statute is ambiguous. Then, at step two, the legal question is whether the agency correctly applied the facts to its declared legal standard – as the Court recognizes in Indiana Federation of Dentists, “the legal question before us is whether the Commission’s factual findings make out a violation of Sherman Act § 1.” Thus, the opening, oft-quoted, first sentence of the paragraph is correct, and is in accord with Chevron: the legal issues presented are for the courts to resolve.

Conclusion

The long-standing belief that FTC interpretations of UMC under Section 5 are not entitled to Chevron deference are almost certainly wrong. I’ve addressed three of the most pervasive myths about this above – there are a couple more, but you’ll need to read the full paper to learn about them and why they are wrong.

Two important questions follow, which we will likely take up in this symposium, and I take up a bit in my article: normatively, should the FTC receive such deference, and, if not, what restraints exist on the scope of the Commission’s Section 5’s UMC power? I’ll conclude with what I believe is the most important takeaway from this post: however we proceed, we must do so with an understanding of both antitrust and administrative law. The relevant audiences for our discussions about these issues are the FTC and Congress – not the courts; and the relevant language is that of policy and statute, not judicial precedent and stare decisis. Administrative law is the unique, beautiful, and scary beast that governs the FTC – those who fail to respect its nuances do so at their own peril.

Filed under: antitrust, federal trade commission, section 5, UMC symposium Tagged: antitrust, Chevron, Competition law, Federal Trade Commission, ftc

Thom Lambert is Wall Family Foundation Chair in Corporate Law & Governance and Professor of Law at University of Missouri School of Law

In the last few weeks, two members of the FTC—Commissioners Josh Wright and Maureen Ohlhausen—have staked largely consistent positions on guidelines for implementation of the Commission’s “unfair methods of competition” (UMC) authority.  Their statements make two points that are, in my opinion, no-brainers.  Where the statements conflict, they raise an issue worthy of significant contemplation.  I’ll be interested to hear others’ thoughts on that matter.

First, the no-brainers.

No-Brainer #1:  We Need Guidance on the Scope of the FTC’s UMC Authority.

Ours is a government of laws and not of men.  That means, in the words of F. A. Hayek, “that government in all its actions [must be] bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”  According to the classic statement by A.V. Dicey, the “Rule of Law” means “the absolute supremacy or predominance of regular law as opposed to arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of government.”  As it stands, Section 5’s prohibition of “unfair methods of competition” is so indeterminate and discretionary that it can hardly constitute law.  The text itself is woefully deficient for, as the Second Circuit observed in analyzing the provision, “[t]he term ‘unfair’ is an elusive concept, often depending upon the eye of the beholder.”  Nor has the caselaw on Section 5 developed in way that lets business planners know what they must and must not do to avoid liability.  The sort of guidance Commissioners Wright and Ohlhausen are proposing, then, is badly needed.

No-Brainer #2:  The FTC Should Not Challenge a Practice Under Its UMC Authority Unless Doing So Is Necessary to Avert an Actual or Likely Harm to Competition.

Commissioners Wright and Ohlhausen agree that for the FTC to bring a “stand-alone” Section 5 action (i.e., one not simply alleging behavior that violates the Sherman Act), the challenged practice must result in, or likely result in, significant harm to competition.  Such harm consists of a reduction in overall market output, usually evinced by an increase in price.  It does not result from mere harm to competitors.  Thus, doing a terrible, horrible, no good, very bad thing to your competitor—while perhaps tortious—would not constitute an unfair method of competition if the action did not, and was not likely to, reduce overall market output.

The reason for this requirement, which may sound harsh and extreme to non-antitrusters, is simple:  Business conduct that hurts competitors without reducing overall market output does not usually leave market output unchanged; rather, it usually enhances market output and thereby benefits consumers.  If the FTC seeks to condemn competitor-harming conduct that doesn’t harm competition, it will likely end up hurting consumers.  In the Brown Shoe case, for example, the FTC condemned exclusive dealing by a shoe manufacturer where harm to competition was unrealistic but competitors were injured.  The effect was to shut down more efficient distribution practices and thereby hurt consumers.  If the FTC is to remain a consumer protection agency, it must limit its UMC challenges to acts causing or threatening significant competitive injury.

That brings us to a somewhat difficult policy question.

The Contestable Issue:  How Broad Should the Safe Harbor for Efficiency-Creating Conduct Be?

Commissioner Wright has taken the position that a second prerequisite to a stand-alone UMC challenge should be that the practice at issue lacks any cognizable efficiencies.  Commissioner Ohlhausen, by contrast, would permit a challenge (assuming her other pre-requisites, which are largely subsumed in Commissioner Wright’s first pre-requisite, are satisfied) when the practice at issue either creates no cognizable efficiencies or “results in harm to competition that is disproportionate to its benefits to consumers and to the economic benefits to the defendant, exclusive of the benefits that may accrue from reduced competition.”  Ohlhausen is careful to emphasize that she is not proposing “to balance precisely” procompetitive versus anticompetitive effects.  Instead, the latter prong of her disjunctive pre-requisite is satisfied only if the surplus lost from reduced output significantly outweighs the efficiencies created by the practice.

As a practical matter, the dispute here may reduce to, “What must a firm show to come within a safe harbor from stand-alone UMC liability?”  According to Commissioner Wright, establishing cognizable efficiencies from the practice at issue will keep you safe.  Commissioner Ohlhausen would require a firm to establish such efficiencies and show that they are not significantly outweighed by lost surplus from reduced output.

So whose approach is better?  I’ll confess that I’ve gone back and forth on that question over the last few days.  On the one hand, Commissioner Wright’s position seems awfully pro-defendant: a tiny increase in productive efficiency stemming from a practice could insulate the practice even if it occasioned huge allocative inefficiencies.  Do we really need so expansive a safe harbor here, given that UMC judgments occasion only injunctive relief (cease and desist orders) and cannot give rise to follow-on private treble damages actions?  On the other hand, Commissioner Ohlhausen’s safe harbor seems pretty unreliable—after-the-fact balancing of competitive effects is always tricky—and there are reasons to worry about follow-on private litigation and the chilling effect it may create.  (For example, as Commissioner Kovacic observed in his N-Data dissent, many states have “little FTC Acts,” a number of which are privately enforceable in treble damages actions.)

At this point, I’m inclined to side with Commissioner Wright on the scope of the safe harbor.  There are few practices that occasion genuine harm to competition but are not covered by the Sherman and Clayton Acts, and most of those—e.g., attempts to collude, market power-creating naked acts of exclusion by firms previously lacking market power—occasion no efficiencies and thus would not come within Commissioner Wright’s broader safe harbor.  See Wright’s Examples 2, 3, 4, 5, 7, 8.  I can think of only one obvious category of conduct that (1) harms competition, (2) is not covered by the Sherman or Clayton Act, and (3) would fall within Commissioner Wright’s, but not Commissioner Ohlhausen’s, safe harbor: oligopolistic coordination using facilitating devices that were adopted unilaterally.  Several prominent antitrust scholars have argued that such conduct should be illegal, see, e.g., Richard A. Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562 (1969); Herbert Hovenkamp, The Antitrust Enterprise 32-35, 128-34 (2005), and Professor Hovenkamp has argued that it should be policed under the FTC’s UMC authority.  See Herbert Hovenkamp, The Federal Trade Commission and the Sherman Act, 62 Fla. L. Rev. 871, 879-82 (2010).  In light of the judicial hostility toward that approach as evidenced in cases such as Ethyl and Boise Cascade, however, I would not be inclined to exchange Commissioner Wright’s broader safe harbor for Commissioner Ohlhausen’s narrower one in the hopes of pursuing such facilitating devices.

Of course, I may be overlooking other categories of anticompetitive conduct that are not covered by the Sherman and Clayton Acts and would be condemned under Commissioner Ohlhausen’s, but not Commissioner Wright’s, approach.  If anyone can think of something obvious, please let me know.

Regardless of how we resolve the controversy over the scope of any “efficiencies safe harbor,” Commissioners Wright and Ohlhausen deserve our thanks and admiration for pressing a long overdue issue and working to improve the state of American competition law.  I look forward to hearing others’ thoughts on the commissioners’ proposals.

Filed under: antitrust, federal trade commission, section 5, UMC symposium Tagged: antitrust, Competition law, Federal Trade Commission, ftc, section 5, UMC

Regulating the Regulators: Guidance for the FTC’s Section 5 Unfair Methods of Competition Authority

August 1, 2013

Truthonthemarket.com

Welcome!

We’re delighted to kick off our one-day blog symposium on the FTC’s unfair methods of competition (UMC) authority under Section 5 of the FTC Act.

Last month, FTC Commissioner Josh Wright began a much-needed conversation on the FTC’s UMC authority by issuing a proposed policy statement attempting to provide some meaningful guidance and limits to the FTC’s authority. Meanwhile, last week Commissioner Maureen Ohlhausen offered her own take on the issue, echoing many of Josh’s points and further extending the conversation. Considerable commentary—and even congressional attention—has been directed to the absence of UMC authority limits, the proper scope of that authority, and its significance for the businesses regulated by the Commission.

Section 5 of the FTC Act permits the agency to take enforcement actions against companies that use “unfair or deceptive acts or practices” or that employ “unfair methods of competition.” The Act doesn’t specify what these terms mean, instead leaving that determination to the FTC itself.  In the 1980s, under intense pressure from Congress, the Commission established limiting principles for its unfairness and deception authorities. But today, coming up on 100 years since the creation of the FTC, the agency still hasn’t defined the scope of its UMC authority, instead pursuing enforcement actions without any significant judicial, congressional or even self-imposed limits. And in recent years the Commission has seemingly expanded its interpretation of its UMC authority, bringing a string of standalone Section 5 cases (including against Intel, Rambus, N-Data, Google and others), alleging traditional antitrust injury but avoiding the difficulties of pursuing such actions under the Sherman Act (or, in a few cases, bringing separate claims under both Section 5 and Section 2).

We hope this symposium will provide important insights and stand as a useful resource for the ongoing discussion.

We’ve lined up an outstanding and diverse group of scholars and practitioners to participate in the symposium.  They include:

• David Balto, Law Offices of David Balto [1] [2]
• Terry Calvani, Freshfields [1]
• James Cooper, GMU Law & Economics Center [1] [2]
• Dan Crane, Michigan Law [1]
• Paul Denis, Dechert [1]
• Angela Diveley, Freshfields [1]
• Gus Hurwitz, Nebraska Law [1] [2]
• Thom Lambert, Missouri Law [1]
• Marina Lao, Seton Hall Law [1]
• Tad Lipsky, Latham & Watkins [1]
• Geoffrey Manne, Lewis & Clark Law/ICLE [1]
• Joe Sims, Jones Day [1]
• Josh Wright, FTC [1]
• Tim Wu, Columbia Law [1]

The first of the participants’ initial posts will appear momentarily, with additional posts appearing throughout the day. We hope to generate a lively discussion, and expect some of the participants to offer follow up posts as well as comments on their fellow participants’ posts—please be sure to check back throughout the day and be sure to check the comments. We hope our readers will join us in the comments, as well.

Once again, welcome!

Filed under: administrative, antitrust, federal trade commission, section 5, UMC symposium Tagged: Federal Trade Commission, ftc, Josh Wright, Maureen Ohlhausen, section 5, UMC

Thom Lambert is Wall Family Foundation Chair in Corporate Law & Governance and Professor of Law at University of Missouri School of Law

In the last few weeks, two members of the FTC—Commissioners Josh Wright and Maureen Ohlhausen—have staked largely consistent positions on guidelines for implementation of the Commission’s “unfair methods of competition” (UMC) authority.  Their statements make two points that are, in my opinion, no-brainers.  Where the statements conflict, they raise an issue worthy of significant contemplation.  I’ll be interested to hear others’ thoughts on that matter.

First, the no-brainers.

No-Brainer #1:  We Need Guidance on the Scope of the FTC’s UMC Authority.

Ours is a government of laws and not of men.  That means, in the words of F. A. Hayek, “that government in all its actions [must be] bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”  According to the classic statement by A.V. Dicey, the “Rule of Law” means “the absolute supremacy or predominance of regular law as opposed to arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of government.”  As it stands, Section 5’s prohibition of “unfair methods of competition” is so indeterminate and discretionary that it can hardly constitute law.  The text itself is woefully deficient for, as the Second Circuit observed in analyzing the provision, “[t]he term ‘unfair’ is an elusive concept, often depending upon the eye of the beholder.”  Nor has the caselaw on Section 5 developed in way that lets business planners know what they must and must not do to avoid liability.  The sort of guidance Commissioners Wright and Ohlhausen are proposing, then, is badly needed.

No-Brainer #2:  The FTC Should Not Challenge a Practice Under Its UMC Authority Unless Doing So Is Necessary to Avert an Actual or Likely Harm to Competition.

Commissioners Wright and Ohlhausen agree that for the FTC to bring a “stand-alone” Section 5 action (i.e., one not simply alleging behavior that violates the Sherman Act), the challenged practice must result in, or likely result in, significant harm to competition.  Such harm consists of a reduction in overall market output, usually evinced by an increase in price.  It does not result from mere harm to competitors.  Thus, doing a terrible, horrible, no good, very bad thing to your competitor—while perhaps tortious—would not constitute an unfair method of competition if the action did not, and was not likely to, reduce overall market output.

The reason for this requirement, which may sound harsh and extreme to non-antitrusters, is simple:  Business conduct that hurts competitors without reducing overall market output does not usually leave market output unchanged; rather, it usually enhances market output and thereby benefits consumers.  If the FTC seeks to condemn competitor-harming conduct that doesn’t harm competition, it will likely end up hurting consumers.  In the Brown Shoecase, for example, the FTC condemned exclusive dealing by a shoe manufacturer where harm to competition was unrealistic but competitors were injured.  The effect was to shut down more efficient distribution practices and thereby hurt consumers.  If the FTC is to remain a consumer protection agency, it must limit its UMC challenges to acts causing or threatening significant competitive injury.

That brings us to a somewhat difficult policy question.

The Contestable Issue:  How Broad Should the Safe Harbor for Efficiency-Creating Conduct Be?

Commissioner Wright has taken the position that a second prerequisite to a stand-alone UMC challenge should be that the practice at issue lacks any cognizable efficiencies.  Commissioner Ohlhausen, by contrast, would permit a challenge (assuming her other pre-requisites, which are largely subsumed in Commissioner Wright’s first pre-requisite, are satisfied) when the practice at issue either creates no cognizable efficiencies or “results in harm to competition that is disproportionate to its benefits to consumers and to the economic benefits to the defendant, exclusive of the benefits that may accrue from reduced competition.”  Ohlhausen is careful to emphasize that she is not proposing “to balance precisely” procompetitive versus anticompetitive effects.  Instead, the latter prong of her disjunctive pre-requisite is satisfied only if the surplus lost from reduced output significantlyoutweighs the efficiencies created by the practice.

As a practical matter, the dispute here may reduce to, “What must a firm show to come within a safe harbor from stand-alone UMC liability?”  According to Commissioner Wright, establishing cognizable efficiencies from the practice at issue will keep you safe.  Commissioner Ohlhausen would require a firm to establish such efficiencies and show that they are not significantly outweighed by lost surplus from reduced output.

So whose approach is better?  I’ll confess that I’ve gone back and forth on that question over the last few days.  On the one hand, Commissioner Wright’s position seems awfully pro-defendant: a tiny increase in productive efficiency stemming from a practice could insulate the practice even if it occasioned huge allocative inefficiencies.  Do we really need so expansive a safe harbor here, given that UMC judgments occasion only injunctive relief (cease and desist orders) and cannot give rise to follow-on private treble damages actions?  On the other hand, Commissioner Ohlhausen’s safe harbor seems pretty unreliable—after-the-fact balancing of competitive effects is always tricky—and there are reasons to worry about follow-on private litigation and the chilling effect it may create.  (For example, as Commissioner Kovacic observed in his N-Data dissent, many states have “little FTC Acts,” a number of which are privately enforceable in treble damages actions.)

At this point, I’m inclined to side with Commissioner Wright on the scope of the safe harbor.  There are few practices that occasion genuine harm to competition but are not covered by the Sherman and Clayton Acts, and most of those—e.g., attempts to collude, market power-creating naked acts of exclusion by firms previously lacking market power—occasion no efficiencies and thus would not come within Commissioner Wright’s broader safe harbor.  SeeWright’s Examples 2, 3, 4, 5, 7, 8.  I can think of only one obvious category of conduct that (1) harms competition, (2) is not covered by the Sherman or Clayton Act, and (3) would fall within Commissioner Wright’s, but not Commissioner Ohlhausen’s, safe harbor: oligopolistic coordination using facilitating devices that were adopted unilaterally.  Several prominent antitrust scholars have argued that such conduct should be illegal, see, e.g., Richard A. Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562 (1969); Herbert Hovenkamp, The Antitrust Enterprise 32-35, 128-34 (2005), and Professor Hovenkamp has argued that it should be policed under the FTC’s UMC authority.  SeeHerbert Hovenkamp, The Federal Trade Commission and the Sherman Act, 62 Fla. L. Rev. 871, 879-82 (2010).  In light of the judicial hostility toward that approach as evidenced in cases such as Ethyl and Boise Cascade, however, I would not be inclined to exchange Commissioner Wright’s broader safe harbor for Commissioner Ohlhausen’s narrower one in the hopes of pursuing such facilitating devices.

Of course, I may be overlooking other categories of anticompetitive conduct that are not covered by the Sherman and Clayton Acts and would be condemned under Commissioner Ohlhausen’s, but not Commissioner Wright’s, approach.  If anyone can think of something obvious, please let me know.

Regardless of how we resolve the controversy over the scope of any “efficiencies safe harbor,” Commissioners Wright and Ohlhausen deserve our thanks and admiration for pressing a long overdue issue and working to improve the state of American competition law.  I look forward to hearing others’ thoughts on the commissioners’ proposals.

Joe Sims is a Partner at Jones Day

I find that discussions on antitrust policy, if they are not to devolve into simple recitations of preferred industrial policy, are most focused when grounded in first principles and, frequently, a little history.  So a few words on both with respect to Section 5, starting with the history.

The FTC Act, in addition to being an early manifestation of the “can we help” school of antitrust, was a reaction to the perceptions of some that the Sherman Act, two decades old at the time, had not been enforced aggressively enough.  Indeed, there was considerable concern that the Supreme Court’s invention, just a couple of years earlier in the Standard Oil decision, of a Rule of Reason doctrine in interpreting the otherwise very broad words of the Sherman Act was going to effectively gut the statute.  Of course, that interpretation almost certainly saved the Sherman Act from an early demise, and opened the door for the extremely wide-ranging enforcement regime we have today.  So in large part, the premises underlying the FTC Act (including the now quaint notion that FTC Commissioners would be business experts) have proven completely wrong.  Does anyone really want to argue today that Standard Oil’s creation of a broad but limiting principle for the unworkable literal language of the Sherman Act was a bad idea?

The main point to take from this history is that the world has changed just a little bit in the last 100 years, so whatever Congress may have intended (of course, the notion of Congressional intent is itself almost a complete oxymoron) in 1914 tells us virtually nothing about what is sensible today.  So I hope we do not hear today the silly argument that the authority exists, so therefore we must use it, or the even sillier argument that if the FTC does not use this “unique” authority, it might as well go out of business.  Whether we need two antitrust agencies is a very valid question, but as we have seen for the last hundred years, Section 5 has very little to add to that debate.

So the real issue today is not what Congress intended a century ago, but what is sensible today – in a very different world.  And to intelligently answer that, we need to return to first principles of competition policy.  Here is how I would phrase the question:  Is even intelligent application (a heroic assumption, no doubt, but appropriate for a policy debate) of an unbounded statutory power by whoever happens to be the majority of FTC Commissioners at any given time likely to improve the competitive environment in the US?

It is very difficult for me to see how that is possible, and even harder to see how it is likely.  We know what the downside is.  Remember 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?”

Oh, but you say:  this is unfair, since that was then and this is now.  No FTC Chair or Commissioner would take this position today.  Well, I refer you to Jon Leibowitz’s concurring opinion in Rambus, where he says that Section 5 is “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.”  Of course, unlike Mike Pertschuck, he does recognize that there must be some constraints, so his version of Section 5 would “only” reach actions that are “collusive, coercive, predatory, restrictive or deceitful, or otherwise oppressive, and without a justification grounded in legitimate, independent self-interest.”  Does that make you feel better?

Let’s be honest.  Enforcement of Section 5, if it actually becomes a regular part of the FTC toolbox, will depend solely on the common sense, good faith, and modesty of the FTC Commissioners as a group.  For purposes of this discussion, we can even assume the former two traits, although history tells us that they are not universal in this sample, because modesty will surely be the toughest test to meet.  By and large, people become FTC Commissioners to do things, not to be modest.  The Rambus dissent quotes, apparently approvingly, a statement from one Senator at the time of the FTC Act debate that “five good men [a reflection of the times] could hardly make mistakes about whether a particular practice is contrary to good morals or not.”  Really?  Don’t we have irrefutable evidence over the years that this assumption about government is clearly wrong?  But even if you don’t agree with that perception, aren’t we well past the time that we are willing to let five men or women enforce their personal moral or social or even business views with the force of law?  As Leibowitz’s outline of “reasonable” criteria shows – and as in fact the Commission’s history clearly demonstrates — if Section 5 is in the toolbox, it will be impossible to resist stretching the language to meet the perceived ill of the day, especially if and when it is too hard – meaning not enough factual or economic evidence – to carry the burden of a Sherman Act challenge.  And who knows what tomorrow’s reverse payment issue will be?

So there is a lot of downside to increased utilization of Section 5.  What is the argument on the other side of the scale?  Is there any need  — literally, any need at all — for Section 5 enforcement today?  If we did not have this anachronistic vestige of the past already on the books, would there be a groundswell of support to pass a new law giving the FTC this authority?  Is there anyone participating in this symposium that is willing to argue that there is any chance that a statue as unhinged as this to any statement of need or standard of application could become law today?  (Dodd-Frank and Obamacare are not good answers, even if they meet this prescription; the policy support in this area is not anywhere near the level of financial manipulation or health care.)

I have yet to hear anyone answer this question persuasively.  To me, it is instructive that the best illustration – certainly the most common example — anyone can give for an actual “need” for Section 5 is to attack invitations to collude – which, in case anyone has not noticed, involves conduct that by definition has no effect on anyone.  So the best argument is that we need to accept all the risks of Section 5 enforcement in order to be able to attack potential anticompetitive agreements that never actually happened?  Would we prefer that people not seek to collude?  Sure.  Does it really matter to anyone if they try and fail?  No.  And this is the best argument anyone can think of after 100 years of trying?  It does not pass the laugh test.

Section 5 is like your appendix – harmless enough if ignored and unused, but very dangerous if aroused or active.  We have already exceeded the optimal number of Section 5 cases this century, and we are only in the 14th year.  Time to stop for at least the next eight decades.  Let’s renew the debate in 2100.