Summary

“A cornerstone of the Initial Determination is that “[u]nder TianRui, the Commission’s discretion cannot be exercised in a way that conflicts with applicable federal law,”1 and, therefore, that “the dispute between U.S. Steel and Respondents in this case must be resolved using the same substantive law that governs federal antitrust cases.” But this conclusion misreads TianRui’s holding, and is misapplied here.

Moreover, because adjudicative process at the ITC, available remedies, and the statutory objectives of Section 337 are substantially different than Article III processes, remedies, and the aims of the antitrust laws when adjudicated in Article III courts, the unmodified importation of standing rules from Article III courts to the ITC is improper.

Finally, the end to which trade laws are directed is not necessarily, or not solely, consumer welfare in an antitrust sense, and a protection of domestic injury — effectively the opposite of what’s required for antitrust standing under the antitrust laws in Article III courts — may be perfectly actionable under Section 337. As Section 337 is a standalone statute, the importation of antitrust rules can be effected only to the extent that such importation furthers the objectives of Section 337 — and certainly not in a way that would contravene them…”

So I’ve just finished writing a book (hence my long hiatus from Truth on the Market).  Now that the draft is out of my hands and with the publisher (Cambridge University Press), I figured it’s a good time to rejoin my colleagues here at TOTM.  To get back into the swing of things, I’m planning to produce a series of posts describing my new book, which may be of interest to a number of TOTM readers.  I’ll get things started today with a brief overview of the project.

Read the full piece here.

Many tech policy questions remain as we prepare to greet our new President. It’s impossible to know what the tech priorities will be before they are announced, but there are some key issues relevant to innovation that will undoubtedly be at the forefront of their minds, given the president’s focus on job growth: the future of work and of property rights online.

Read the full piece here.

Behavioral economics has taken the academy by storm over the past two decades. The Obama administration has even looked to the discipline—which posits that psychological biases frequently lead consumers to make bad economic decisions—to shape government policy. But is behavioral economics relevant to interpreting the Constitution? That’s the novel claim raised by Expressions Hair Design v. Schneiderman, which the Supreme Court will hear Tuesday.

Read the full piece here.

Summary

Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 [“Section 5”], is a consumer protection statute, not a data security rule. See Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction, Letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, United States Senate (Dec. 17, 1980) [“Unfairness Statement”], reprinted in International Harvester Co., 104 FTC 949, 1073 (1984) [“International Harvester”] (quoting 83 Cong. Rec. 3255 (1938) (remarks of Senator Wheeler)) (“Unjustified consumer injury is the primary focus of the FTC Act….’”).

This fundamental point has been lost in the Commission’s approach to data security. The touchstone for Section 5 actions is not “reasonableness,” but consumer welfare: Does this enforcement action deter a preventable “unfair” act or practice that, on net, harms consumer welfare, and do the benefits to consumers from this action outweigh its costs? Section 5’s purpose is neither fundamentally remedial nor prescriptive. Concern for consumer welfare means deterring bad conduct, avoiding over-deterrence of pro-consumer conduct, minimizing compliance costs, and minimizing administrative costs (by focusing only on substantial harms) — not preventing every possible harm. Instead of weighing such factors carefully, or even performing a proper analysis of negligence, as it purports to do, the Commission has effectively created a strict liability standard unmoored from Section 5.

Across the Commission’s purported guidance on data security, it has likewise failed to articulate a standard by which companies themselves should weigh costs and benefits to determine which risks are sufficiently foreseeable that they can be mitigated cost-effectively. Thus, in addition to violating the intent of Congress, the FTC has also violated the Constitution by failing to provide companies like LabMD with “fair notice” of the agency’s interpretation of what Section 5 requires.

There is a lot at stake in the struggle to control the proliferation of illicit material online. On one hand, criminal rings use intermediaries to traffic in illegal pharmaceuticals and to commit property theft and a host of other crimes. On the other hand, civil society advocates (and intermediaries themselves) raise the threat of mass censorship arising from attempts to impose obligations upon intermediaries that would require them to assist in deterring illegal activity.

Even after more than two decades of case l aw on the subject, questions relating to basic jurisdictional authority over intermediaries remain evergreen.

Read the full piece here.

Summary

It’s hardly an overstatement to claim that data is (or is fast becoming) the lifeblood of the modern economy. As new business models built on innovative uses of data emerge in the economy, these businesses are confronted with increasing regulatory constraints that may work to limit both the scope of their operation as well as their corporate structure.

Nominally in the name of consumer protection, largely in response to foreign government surveillance threats, but also significantly as a form of protectionism, many countries
around the world have adopted various and differing data localization laws — what Chander and Le aptly call “data nationalism” — that either preclude or make more difficult the removal of data from a particular country.

Multinational data platforms (e.g., search engines, product review sites, electronic payment services (including credit cards), data brokers, and the like) that process data in a central location and/or that combine data across borders in order to improve their predictive algorithms are particularly affected by such rules.

Regulatory and legal approaches that make the collection and use of data more expensive along certain dimensions must, at least marginally, induce some companies to alter their behavior to avoid those costs and, consequently, to eschew potentially more beneficial business arrangements in favor of ones that correlate with lower regulatory risk, lower regulatory cost, and/or greater regulatory predictability. “However, regulation often influences behavior in ways that differ from the initially stated rationale.” By disrupting organizational structures designed to work with data, firms will respond to these regulations not only by altering their data collection and use practices, but also the organizational structures that complement them.

Data (information) regulation (as opposed to other types of regulation) is particularly likely to affect institutional structure. As Luis Garicano notes:

Organizations exist, to a large extent, to solve coordination problems in the presence of specialization. As Hayek pointed out, each individual is able to acquire knowledge about a narrow range of problems. Coordinating this disparate knowledge, deciding who learns what, and matching the problems confronted with those who can solve them are some of the most prominent issues with which economic organization must deal.

Regulations that affect how firms can collect, store, use and disseminate information may
thus have significant effect on firm governance and organization.

Faced with costly regulations, firms engage in something akin to regulatory arbitrage. They face a tradeoff between incurring (or reducing) regulatory costs on the one hand, and increasing transaction costs on the other and, when regulatory costs are high enough relative to transaction costs, will rationally choose the latter over the former:

[Firms] face a tension between reducing regulatory costs on the one hand and increasing Coasean transaction costs on the other. Deal lawyers routinely depart from the optimal transaction-cost-minimizing structure even though restructuring the deal reduces its (nonregulatory) efficiency. A corporation that needs cash might minimize transaction costs by entering into a secured loan, but instead, in order to improve the cosmetics of the balance sheet, enters into an economically similar transaction to securitize the assets. A company that would minimize agency costs by incorporating in Delaware decides that, to save on taxes, it will instead incorporate in Bermuda. So long as the regulatory savings outweigh the increase in transaction costs, such planning is perfectly rational.

Unlike the theory of regulatory arbitrage, however, what I am suggesting here is not simply that firms exploit imperfectly drafted laws and regulations in order to opt-in to more preferable legal regimes (although that is certainly part of it). Instead, I am also suggesting that firms will structure their businesses in part to minimize the impact of legal rules, even where they still apply.

While many data and related privacy regulations are nominally aimed at consumer protection, efforts to avoid stricter consumer protection per se, in order to “exploit” consumers may not be the primary or even significant impetus behind firms’ efforts to arbitrage such rules. Instead they may be driven more significantly by efforts to evade the broader consequences of such laws for how their businesses innovate and experiment, what business models they employ, and how they are structured.

A related point is that effective use of data often (always?) requires implementation of complementary organizational structures. Rules affecting the collection and use of data may under-appreciate the inter-relatedness of data (technology) and its internal implementation (organization), such that their enactment and enforcement will engender not just technological responses, but organizational ones, as well.

Regulation imposes costs and rational actors seek to avoid those costs. But the situation here isn’t binary. Sometimes, when parties avoid costs, they merely seek to avoid a higher expense, and substitute for something more affordable — a substitution that is, by definition,
a second-best (or worse) outcome.

This dynamic could manifest itself as companies simply choosing to collect and use less data, but it could mean a lot of other things as well. It could affect corporate organization (e.g., deterring vertical integration or creating “data firewalls” between different divisions of a company), encourage limits on the geographic scope of data collection or operation, affect the mechanisms for determining executive compensation, or (further) encourage jurisdictional considerations to dictate incorporation and principal place of business
decisions. While choosing second-best options is rational from the perspective of regulated parties, it is nevertheless costly to society, both in terms of the firm’s efficient operation relative to its operation in a viable alternative regulatory regime and to consumer welfare generally.

Data regulations may also deter entry, thereby indirectly affecting business and organizational decisions of incumbent firms in the market.

Such consequences are often unobserved and unintended. The hypothesis presented here is that the actions of over-eager regulatory agencies will have a host of unintended effects not just on data use directly, but on how firms are organized, how business is done, and on corporate governance more broadly. The goal of this project is to discover and elucidate as much of this unseen ground as possible, and to determine the extent to which particular information regulation rules affect these outcomes.

 

Summary

Petitioners base their First Amendment argument on two premises: first, that surcharges are “more effective” than discounts at altering consumer behavior; and second, that surcharges and discounts are economically equivalent except for their labels. Under this view, because the only difference between discounts and surcharges is how they are framed, it must be this framing that leads to the difference in consumers’ responses. To explain why Petitioners believe this is true—and, thus, to maintain their claim that New York’s surcharge prohibition is an impermissible restriction on speech—Petitioners and their amici rely on the behavioral economic concepts of “framing” and “loss aversion.” They claim that the State impermissibly wishes to prohibit surcharging because these cognitive biases render surcharge labels more effective than discount labels in altering consumers’ preferred form of payment.

Petitioners’ premises are wrong. There is no sound evidence that the asserted behavioral theories are at work here, or that credit-card surcharging— much less the mere label used to describe the practice—more greatly affects consumers’ chosen method of payment than cash discounting. In fact, some of the studies on which Petitioners and their amici rely suggest the opposite. The Court should not rely, in the absence of sound supporting evidence, on a malleable theory that can be used to support contradictory positions.

Moreover, surcharges and discounts differ in material ways beyond the words used to describe them. Surcharging—but not discounting—enables merchants to engage in certain pricing and sales practices that explain both consumers’ different responses to them, as well as the State’s interest in regulating them differently. And while petitioners lack empirical support for the behavioral claims at the heart of their First Amendment argument, the evidence from countries that permit surcharging reveals that merchants often use surcharges to engage in these types of pricing practices. This Court should thus reject Petitioners’ invitation to base constitutional doctrine on a behavioral hypothesis unsupported by any sound empirical evidence—especially where, as here, that result could potentially expose consumers to the type of conduct that the State’s law seeks to prevent.