Republic 3.0’s Capitol Hill briefing on design patents featuring David Gerk, USPTO; Rebecca Tushnet, Georgetown University School of Law; Julie Hopkins, Tydings & Rosenberg LLP; Geoffrey Manne, International Center for Law and Economics; and Anne Kim and Rob Keast, Republic 3.0.

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.

TechFreedom and the International Center for Law & Economics will shortly file two joint comments with the FCC, explaining why the FCC has no sound legal basis for micromanaging the Internet—now called “net neutrality regulation”—and why such regulation would be counter-productive as a policy matter. The following summarizes some of the key points from both sets of comments.

Read the full piece here.

The cry for Internet regulation is familiar. “Net neutrality” rules are the most recent episode in a recurring story in which proponents seek to limit competition while claiming that nothing less than the future of the Internet is at stake.

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