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Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines

Scholarship Abstract Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their . . .

Abstract

Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their anticompetitive costs. By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, increase public understanding and confidence, and promote international cooperation.

But the 2023 Draft Merger Guidelines do not. They go to great lengths to articulate the potential anticompetitive costs of mergers but with no way to gauge “substantiality.” Most significantly, they ignore potential benefits, which eliminates the need for balancing. In other words, the Draft Guidelines provide very little guidance about current practice which adds risk, which deters mergers, which seems to be the point. We offer specific recommendations for Horizontal, Vertical, and Tech Mergers that do a better job differentiating procompetitive mergers from anticompetitive ones.

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Antitrust & Consumer Protection

The FTC’s Gambit Against Amazon: Navigating a Multiverse of Blowback and Consumer Harm

TOTM The Federal Trade Commission (FTC) is reportedly poised some time within the next month to file a major antitrust lawsuit against Amazon—the biggest yet against . . .

The Federal Trade Commission (FTC) is reportedly poised some time within the next month to file a major antitrust lawsuit against Amazon—the biggest yet against the company and the latest in a long string of cases targeting U.S. tech firms (see, for example, here and here). While specific details of the suit remain largely unknown and subject to changes up to the 11th hour, according to Politico, the FTC’s multi-pronged case is likely to focus on three aspects… Read the full piece here.
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Antitrust & Consumer Protection

German Big Tech Actions Undermine the DMA

ICLE Issue Brief Abstract The complexity of the European Union’s Digital Markets Act (DMA) raises various difficult interpretative questions. Chief among them is whether the EU law is . . .

Abstract

The complexity of the European Union’s Digital Markets Act (DMA) raises various difficult interpretative questions. Chief among them is whether the EU law is effective in achieving its purpose of harmonizing the national laws of EU member states. The issue is not just of academic concern; if the DMA falls short in this regard, it could be viewed as having been founded on flawed legal grounds, potentially rendering it null and void. In this context, we examine recent actions by the German Federal Cartel Office (Bundeskartellamt; FCO) regarding large technology-sector firms that the DMA would regulate as “gatekeepers.” This issue brief outlines two competing legal interpretations of potential relevance. One option is that the FCO’s actions may contravene EU law. Alternatively, the recent German actions could indicate that the DMA fails in its purpose as a harmonizing measure, thereby casting doubts on the law’s validity.

I. The DMA Must Be a Harmonizing Measure

Every law enacted by the EU legislature must have a legal basis in the EU treaties. Without an appropriate treaty basis, the law would be invalid. The DMA’s drafters chose Article 114 of the Treaty on the Functioning of the European Union (TFEU) as its legal basis. Notably, unlike Article 352 TFEU, Article 114 does not require unanimity among EU member states for a law to be enacted. Because the provision has a lower threshold of member-state consent, it is more limited in its scope.

Article 114 TFEU allows adoption of “the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market.” In other words, it empowers the creation of harmonizing measures: EU laws that address diverging rules among the member states that “are such as to obstruct the fundamental freedoms and thus have a direct effect on the functioning of the internal market or to cause significant distortions of competition.”[1] Given that the DMA was adopted with Article 114 as its legal basis, it must satisfy those requirements. If it does not, then it risks invalidation by the EU Court of Justice.

II. The DMA’s Potential Ineffectiveness in Harmonization

As Alfonso Lamadrid de Pablo & Nieves Bayo?n Ferna?ndez have persuasively argued, an interpretation of the DMA that rendered it ineffective as a harmonization measure would, in turn, threaten the law’s validity,[2] a concern that has also been noted by Jasper Van den Boom.[3] In a similar vein, Giuseppe Colangelo has argued that the European legal framework could become more fragmented because of overlaps between, and the potential dual application of, the DMA and competition law.[4] Further, Marco Cappai & Colangelo have warned that such overlaps raise the risks of double or even triple jeopardy for defendants in competition cases.[5]

As Lamadrid & Ferna?ndez argued, the initial threshold question is whether there are, or are likely to arise, sufficient significant divergences among national laws to justify invoking Article 114 TFEU. Provided that they exist, the follow-up question is whether the DMA addresses those divergences effectively. According to Lamadrid & Ferna?ndez, if courts interpret the DMA rules meant to ensure harmonisation narrowly—namely, Article 1(5)-(7)—there is a risk that they will fail to pre-empt the very fragmentation that the law is supposed to address.[6]

The Impact Assessment for the DMA proposal gave several examples of diverging national laws, including Section 19a of the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschra?nkungen; GWB).[7] Most recently amended in 2021, the GWB is intended to apply to businesses with “paramount cross-market significance”—a designation defined differently than the DMA’s “gatekeepers” but which likely would be applied to essentially the same set of companies. Colangelo cited the amended GWB—describing it as a kind of “Germanexit”—in arguing that the potential for overlapping enforcement of the DMA and national competition rules is exacerbated where member states strengthen their antitrust-enforcement tools with platform-specific provisions.[8]

On one hand, Article 1(5) states that member states “shall not impose further obligations on gatekeepers by way of laws, regulations or administrative measures for the purpose of ensuring contestable and fair markets.” But on the other hand, it qualifies this mandate by excluding prohibition measures that are “outside the scope of this Regulation,” so long as gatekeepers are not targeted explicitly for being gatekeepers. Lamadrid & Ferna?ndez suggest that the effect of this qualification may be to “exempt, permit, and leave unchanged all of the rules identified in the Commission’s Impact Assessment as sources of existing or likely regulatory fragmentation.”[9]

Article 1(6) states that the DMA is without prejudice to the application of EU competition law (Articles 101-102 TFEU); national rules analogous to EU competition law (letter (a)); rules on merger control (letter (c)); and also “national competition rules prohibiting other forms of unilateral conduct insofar as they are applied to undertakings other than gatekeepers or amount to the imposition of further obligations on gatekeepers” (letter (b)). Lamadrid & Ferna?ndez note:

Under this provision, Member States would remain free to enact new rules overlapping with those in the DMA, or even establish ‘additional obligations’, provided that these are enacted as part of their national competition rules and do not only target gatekeepers as defined in the DMA.[10]

Without questioning that a narrow interpretation is possible, Van den Boom argued that there should be a way to interpret the DMA’s pre-emptive provisions more broadly to ensure effective harmonization.[11] Van den Boom concludes that national laws like the German Section 19a GWB may need to be revised in the light of a broader, harmonization-preserving interpretation of the DMA.[12]

III. FCO Objections to Google’s Data Processing Across Services

In December 2022, the FCO issued a statement of objections regarding Google’s processing of user data across services, which noted that, under Google’s current terms, data from many services can be combined to construct user profiles for advertising and other purposes.[13] The data is collected and processed across such platforms as Google Search, YouTube, Google Maps, and even third-party sites, as well as Google’s background services, with the company periodically drawing data from Android devices.

The FCO tentatively concluded that these terms did not offer users adequate choice regarding the extensive cross-service data processing, deeming the current options insufficiently transparent and overly broad. In announcing that they would require Google to modify the choices available to users, the FCO relied on Section 19a GWB, the same provision that the DMA Impact Assessment offered as an example of the kind of legal fragmentation that the DMA was meant to address. Moreover, and crucially, the object of the FCO’s investigation—combining user data across services—is covered by the DMA in its Article 5(2). This suggests that the FCO’s may actions are prohibited by the DMA (in Articles 1(5)-(6)).

In addressing concerns that their actions were pre-empted by the DMA, the FCO claimed that they were applying domestic competition law, which would suggest that Article 1(5) DMA does not apply. The FCO also noted that no “core platform services” have been designated under the DMA, and thus we do not yet technically have any “gatekeepers” for the purposes of the DMA’s pre-emption rules. Finally, the FCO asserts that the domestic legal basis (Section 19a GWB) of their investigation “partially exceeds the future requirements of the DMA” and, moreover, that “the Bundeskartellamt is in close contact with the European Commission.”[14]

IV. The FCO Versus the DMA

By its own admission, the FCO is pursuing Google for conduct to which the European Commission is likely to apply the DMA. The FCO thus appears to be trying to beat the Commission to the chase and impose its own regulatory vision before the Commission has time to act.

The Google investigation is part of the FCO’s broader agenda for large tech firms. The agency has already used Section 19a GWB to designate Alphabet, Amazon, Apple, and Meta as having “paramount significance for competition across markets,” while an investigation to similarly designate Microsoft is pending.[15] Some, if not all, of those companies are likely to also be deemed “gatekeepers” by the European Commission under the DMA.

More importantly, at least some ongoing Section 19a investigations relate to matters covered by the DMA. For example, the FCO’s investigation of Apple’s app-tracking transparency framework focuses on so-called “self-preferencing,” a practice that the Commission could determine the DMA covers.[16] The FCO commenced that investigation after final agreement on the DMA in March 2022. Similarly, the FCO’s ongoing investigation of Meta similarly concerns the processing of user data across services, which is clearly covered by the DMA, provided that the relevant Meta services will be designated under the DMA as gatekeepers.[17]

If the Commission designates Google and its services under the DMA, the company would be subject to Article 5(2) DMA, which would require that Google obtain user consent to:

(a) process, for the purpose of providing online advertising services, personal data of end users using services of third parties that make use of core platform services of the gatekeeper;

(b) combine personal data from the relevant core platform service with personal data from any further core platform services or from any other services provided by the gatekeeper or with personal data from third-party services;

(c) cross-use personal data from the relevant core platform service in other services provided separately by the gatekeeper, including other core platform services, and vice versa; and

(d) sign in end users to other services of the gatekeeper in order to combine personal data.

The key notions of “specific choice” and “consent” in Article 5 DMA pose difficult technical and legal questions. Exactly how Google would implement such cross-service processing of data in compliance with the DMA will be a matter for discussion between Google and the European Commission.

Different authorities are likely to reach different conclusions as to how to approach such problems. But given that the DMA is based on Article 114 TFEU and thus intended as a harmonization measure, its chief purpose must be to prevent fragmentation of regulatory approaches to issues clearly covered by the DMA. This is true irrespective of whether a national authority purports to rely on national competition rules or on other national law.

The FCO noted that Section 19a GWB “partially exceeds” the DMA’s requirements, which is a curious choice of phrase. It would appear to admit that the national law overlaps with the DMA. To the extent that such an overlap exists, application of the law to designated gatekeepers is pre-empted by Articles 1(5)-(6) DMA. Even if the FCO could show that some requirements they intend to impose on Google “exceed” what the Commission would do under the DMA, this would not render that FCO’s actions outside the scope of DMA’s pre-emptive provisions.

The FCO’s stated intent is to impose its own interpretation of what constitutes “sufficient choice” as to whether and to what extent “users agree to cross-service data processing.” Based on these assertions, it is difficult to see how the FCO’s action would either be “outside the scope” of the DMA (Article 1(5) DMA) or constitute a “further obligation” (Article 1(6) DMA). If the DMA is to be an effective harmonizing measure, then the mere fact that a national authority has an idiosyncratic interpretation of user choice and consent in the context of cross-service data processing cannot be sufficient for its actions to constitute a “further obligation.”

Any other reading of the DMA would serve to nullify Articles 1(5)-(6). Whenever any national authority disagrees with how the Commission enforces the DMA, they could simply adopt national measures that “exceed” the DMA in that they differ from the Commission’s approach. Given the scope of Article 5(2) DMA, interpreting Articles 1(5)-(6) not to preclude the FCO’s actions would jeopardize the DMA’s validity as a harmonising measure under Article 114 TFEU.

As the FCO itself has noted, the Commission has not yet designated any “gatekeepers” or their “core platform services.” The FCO has, however, conceded that its actions against Google concern services that are “likely” to be designated and therefore covered by the DMA. To preserve the DMA’s validity, actions like the FCO’s against services that are within the DMA’s scope must be pre-empted. With services that are not yet—but are likely to be—designated, actions by a national authority that will be illegal once the services are designated should also be considered illegal while a designation is imminent. This reading follows both from the DMA’s function as a harmonizing measure under Article 114 TFEU and from the principle of sincere cooperation (Article 4 TEU).

Pre-emption does not have to render Section 19a GWB and similar national rules a dead letter. As Gunnar Wolf & Niklas Brüggemann argue, there is space for “complementarity” between the DMA and national law.[18] If, however, the DMA is to remain an effective harmonizing measure, the scope for national action in areas regulated by the DMA must be narrow. It does not appear that the FCO’s proposed action is “complementary” to the DMA. Rather, it is a brazen attempt to circumvent the DMA’s harmonizing function.

V. Conclusion

The FCO and other national authorities may be less concerned than the European Commission with preserving the DMA’s validity. In fact, the FCO’s actions suggest that they are chafing against the restraints imposed by the DMA and would prefer to act as if the restraints do not apply. It would be surprising if the Commission did not respond with a more assertive approach to such prima facie breaches of EU law by national authorities. The stakes are high. If the Commission tacitly accepts an interpretation of the DMA that gives national authorities free rein for these kinds of enforcement actions, then it will cease to be a harmonizing measure and, as such, would be invalid.

[1] Case C-58/08 Vodafone, O2 et al. v Secretary of State, EU:C:2010:321 ¶ 32.

[2] Alfonso Lamadrid De Pablo & Nieves Bayón Fernández, Why the Proposed DMA Might Be Illegal Under Article 114 TFEU, and How to Fix It, 12 J. Eur. Compet. Law Pract. 576 (2021).

[3] Jasper Van den Boom, What Does the Digital Markets Act Harmonize?–Exploring Interactions Between the DMA and National Competition Laws, 19 Eur. Competition J. 57, 69 (2023).

[4] Giuseppe Colangelo, The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse, Eur. Law Rev. 597 (2022).

[5] Marco Cappai & Giuseppe Colangelo, Applying Ne Bis in Idem in the Aftermath of BPost and Nordzucker: The Case of EU Competition Policy in Digital Markets, 60 Common Mark. Law Rev. (2023).

[6] De Pablo & Fernández, supra note 2.

[7] European Commission, Commission Staff Working Document Impact Assessment Report Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on contestable and fair markets in the digital sector (Digital Markets Act), Part 2, 112-113 (2020), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020SC0363.

[8] Colangelo, supra note 4.

[9] Id, 580.

[10] Id.

[11] Van den Boom, supra note 3.

[12] Id, 84.

[13] Bundeskartellamt, Statement of Objections Issued Against Google’s Data Processing Terms, (2023), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2023/11_01_2023_Google_Data_Processing_Terms.html.

[14] Id.

[15] Bundeskartellamt, Proceedings against large digital companies – on the basis of Sec. 19a GWB – as of May 2023, (2023), https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Downloads/List_proceedings_digital_companies.pdf. Note that Amazon and Apple are disputing their designation under Section 19a and according to the FCO the court proceedings are not yet finalized.

[16] Bundeskartellamt, Bundeskartellamt reviews Apple’s tracking rules for third-party apps, (2022), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2022/14_06_2022_Apple.html. As noted in the previous footnote, Apple is disputing their designation under Section 19a.

[17] Bundeskartellamt, Meta (Facebook) responds to the Bundeskartellamt’s concerns – VR headsets can now be used without a Facebook account, (2022), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2022/23_11_2022_Facebook_Oculus.html.

[18] Gunnar Wolf & Niklas Brüggemann, Agenda 2025: the Digital Markets Act and Section 19a GWB, D’Kart (2022), https://www.d-kart.de/en/blog/2022/07/19/agenda-2025-der-digital-markets-act-und-§19a-gwb.

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Antitrust & Consumer Protection

ICLE Amicus in En Banc Rehearing Before the 9th Circuit in Epic Games v Apple

Amicus Brief INTEREST OF THE AMICUS CURIAE The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building . . .

INTEREST OF THE AMICUS CURIAE

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy.  ICLE promotes the use of law and economics methodologies to inform policy debates and has longstanding expertise evaluating antitrust law and policy.

ICLE has an interest in ensuring that antitrust law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis.  That includes ensuring consistency between antitrust law and other laws that proscribe unfair methods of competition, such as California’s Unfair Competition Law.[1]

INTRODUCTION

The panel’s holdings that (1) Apple’s conduct with respect to its close control over the App Store and restrictions on in-app payments (“IAP”) do not give rise to an antitrust violation, but that (2) its anti-steering provisions nevertheless violate California’s Unfair Competition Law (“UCL”), are incongruent.  The anti-steering provisions violate the UCL only if they constitute an “incipient violation of an antitrust law, or . . . [cause harm] comparable to or the same as a violation of the law.”  Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 186-87 (1999).  But provisions limiting app developers’ ability to steer consumers to alternative payment options exist merely to further the goals of the lawful IAP restrictions, and thus the anti-steering provisions cannot constitute incipient antitrust violations or cause harm comparable to such violations.

Having affirmed the District Court’s finding that Apple’s IAP policies are procompetitive, the panel should have ruled that Apple’s anti-steering provisions—which constitute a less restrictive means of pursuing the same procompetitive objective—are not unfair under the UCL.  The panel’s decision, if it stands, risks chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s “walled-garden” iOS.  See Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (“[F]alse condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’”) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)).  More egregiously, it risks creating a fundamental contradiction by enjoining conduct under the UCL that is benign—and even beneficial—under antitrust law.

ARGUMENT

I.              Antitrust Laws and Laws on Unfair Methods of Competition Share the Same Goal: Protecting Competition, not Competitors

Antitrust and other laws aimed at proscribing unfair methods of competition (“UMC”) share the same overarching rationale, and thus “we can classify unfair competition and antitrust as blood brothers or, at least, as brothers-in-law.”  Rudolf Callmann, Unfair Competition and Antitrust: Coexistence Within Complementary Goals, 13 Antitrust Bull. 1335, 1335 (1968).  Both types of laws were enacted to protect consumers by protecting “competition, not competitors.” Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (emphasis in original); accord Cel-Tech, 20 Cal. 4th at 186-87 (citing this language and defining “unfair” in the UCL to include incipient antitrust violations and other conduct that “significantly threatens or harms competition”) (emphasis added).

Thus, while harm to a competitor may provide an evidentiary basis for demonstrating harm to competition under both antitrust and UMC laws, it is not sufficient for a viable claim under either.  Indeed, just as conduct that constitutes vigorous competition in one context can cause anticompetitive harm in another, so too may conduct that harms a competitor promote competition overall.  Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458-59 (1993) (“The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself . . . . It is sometimes difficult to distinguish robust competition from conduct with long-term anticompetitive effects . . . .”); New York v. Microsoft Corp., 224 F. Supp. 2d 76 (D.D.C. 2002) (“conduct that is in some respect adverse to competitors is almost implicit in the concept of competition”).  In order to avoid condemning beneficial conduct, only a few forms of conduct are per se antitrust violations, and the vast majority are assessed based on their economic effects.

UMC law is nominally more focused on the nature of the conduct at issue—whether it is “unfair.”  As in antitrust, a few forms of conduct are facially problematic under UMC law.  Most notably, conduct that violates some other law or policy may also violate UMC law.[2]  But where the basis for an unfairness claim under UMC law is inchoate harm to competition, decades of scholarship and judicial decisions have made clear that the conduct should be assessed using the same principles and effects-based logic of antitrust.  “[A] rigid separation of the antitrust laws and the law of unfair competition is neither legally realistic nor economically desirable.”  Callmann, supra, at 1345.

The same is true under the UCL: “[T]he determination of whether a particular business practice is unfair necessarily involves an examination of its impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer.  In brief, the court must weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.”  Motors, Inc. v. Times Mirror Co., 102 Cal. App. 3d 735, 740 (Cal. Ct. App. 1980).

The logic is simple.  Because consumers benefit from vigorous competition, antitrust law does not punish companies for competing on the merits, even if rivals are harmed or eliminated as a result.  See Spectrum Sports, 506 U.S. at 458; Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 758, 767 (1984); NYNEX v. Discon, 525 U.S. 128, 135-36, 139 (1998).  Using UMC laws to ban conduct merely because it harms competitors would risk undermining the very rationale of competition and, by extension, the UMC laws that seek to protect it.  See Cel-Tech, 20 Cal. 4th at 185 (an improper definition of unfair “may even lead to the enjoining of procompetitive conduct and thereby undermine consumer protection, the primary purpose of the antitrust laws”) (emphasis in original).  Under UMC law as under antitrust law, “[c]ourts must be careful not to . . . prevent rigorous, but fair, competitive strategies that all companies are free to meet or counter with their own strategies.  Companies that cannot compete with others that are more capable or efficient may lawfully fail.”  Id.

A.            The Unified Interpretation of UMC and Anticompetitive Conduct under the Antitrust Laws Is Well Established

As the California Supreme Court has held, in order to establish the meaning of “unfair” under the UCL, “we may turn for guidance to the jurisprudence arising under the ‘parallel’ Section 5 of the Federal Trade Commission Act.  ‘In view of the similarity of language and obvious identity of purpose of the two statutes, decisions of the federal court on the subject are more than ordinarily persuasive.’”  Cel-Tech, 20 Cal. 4th at 185 (citations omitted).

“As with the Sherman Act, conduct challenged under Section 5 ‘must have an “anticompetitive effect.’”  That is, it must harm the competitive process and thereby harm consumers.  In contrast, harm to one or more competitors will not suffice.’”  Statement of FTC Commissioner Joshua D. Wright on the Proposed Policy Statement Regarding Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act, at 7 (June 19, 2013) (quoting United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc)).

Indeed, in the more than 100 years of history interpreting the FTC Act, “[a]n understanding emerged that the FTC’s UMC authority reached somewhat beyond the Sherman Act, but was still tethered to the central antitrust concepts of the consumer welfare standard and the ‘rule of reason,’ both of which offer courts a means to evaluate the legality of market behavior in terms of its likely harms and benefits.”  Geoffrey A. Manne & Daniel Gilman, FTC UMC Authority: Uncertain Scope, Int’l Ctr. for L. & Econ. (Jan. 19, 2023), https://laweconcenter.org/resources/ftc-umc-authority-uncertain-scope/.

The legislative history of the FTC Act makes clear its alignment with the principle of “harm to competition, not competitors” undergirding antitrust law: “The unfairness must be tinctured with unfairness to the public; not merely with unfairness to the rival or competitor . . . .  We are not simply trying to protect one man against another; we are trying to protect the people of the United States, and of course, there must be in the imposture or in the vicious practice or method something that has a tendency to affect the people of the country or be injurious to their welfare.”  51 Cong. Rec. 11,105 (1914) (Remarks of Senator Cummins).

Scholars have developed a robust body of work confirming that the FTC Act was meant to supplement the Sherman Act.  See, e.g., Gregory J. Werden, Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act: What Is the Intelligible Principle?, Mercatus Center Working Paper 4, 19-22 (2023).  And even former FTC Chairman William Kovacic has written that the FTC “should not . . . rely on the assertion . . . that the Commission could use its UMC authority to reach practices outside both the letter and spirit of the antitrust laws.”  William E. Kovacic & Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 Antitrust L.J. 929, 945 (2010).

While these statements relate to federal statutes, the more general point on the shared rationale between antitrust and unfair competition laws extends beyond the specific relationship between the Sherman and Clayton Acts on the one hand, and the FTC Act on the other.  In fact, the California Court of Appeals has explicitly endorsed this view, finding that, where the same conduct is “alleged to be both an antitrust violation and an ‘unfair’ business act or practice for the same reason—because it unreasonably restrains competition and harms consumers—the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not ‘unfair’ toward consumers.”  Chavez v. Whirlpool Corp., 93 Cal. App. 4th 363, 375 (Cal. Ct. App. 2001).

True, in Cel-Tech an “unfair” claim was allowed to proceed despite the plaintiff failing to make out an antitrust violation.  Cel-Tech, 20 Cal. 4th 163.  But Cel-Tech is the rare case where anticompetitive conduct—below cost sales—may be actionable under the UCL but not under antitrust law because of the idiosyncratic structure of the industry and the regulatory context.  See id. at 189 (“This case has an unusual circumstance that might bring it within the unfair competition law’s coverage. . . . ‘[F]air and honest competition’ in equipment sales might not be possible when a legally privileged company sells equipment below cost as a strategy to increase profits on service sales that are prohibited to its equipment competitors.”).  Ultimately, however, the underlying logic of the UCL and antitrust claims in Cel-Tech was rooted in the same unified goal: protecting competition.

The case at hand, however, is fundamentally different.  Here, Epic is essentially asking that Apple be forced to aid its competitors, a position that is contrary to the ethos of both antitrust law and the UCL.

B.            The Connection Between Unfair Competition and Anticompetitive Conduct Is Recognized by California Courts

The UCL contains three distinct bases for establishing a violation, two of which are relevant here: “unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice . . . .”  Cal. Bus. & Prof. Code § 17200 (emphasis added).[3]  But the panel erred when it declared that requiring a violation of antitrust law would collapse the unlawful and unfair prongs of this disjunctive standard.  While there is inevitably overlap between the assessment of antitrust law under the two prongs (because “unfairness” inherently imports antitrust concepts and standards), the “unlawful” prong is not rendered a nullity by the role of antitrust standards in assessing the unfairness prong because that prong relates to laws other than antitrust.  Actual violations of antitrust law may also constitute violations of the UCL.  See, e.g., In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., 383 F. Supp. 3d 187, 267 (S.D.N.Y. 2019) (“Because I have concluded that the IPPs have adequately pleaded that Keurig’s conduct was an unfair restraint of trade, I also conclude that they have adequately pleaded that it was unfair under the California Unfair Competition Law.”).

Thus, the court in Cel-Tech first addressed potential non-antitrust sources of harm and then considered the role of antitrust law only in its exegesis of the “unfair” prong of the UCL.  That is why the decision considered whether (1) any provision of the California Unfair Practices Act offers a basis for liability or provides a “safe harbor” from liability, or (2) stated policies of the California Public Utilities Commission could be undermined by the conduct in question.  Cel-Tech, 20 Cal. 4th at 182-91.

The California Supreme Court then separately considered whether antitrust law might serve as a basis for liability, and did so under the “unfair” prong of the UCL.  There, it established that “the word ‘unfair’ in [the UCL] . . . means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.”  Cel-Tech, 20 Cal. 4th at 187.  It is impossible to read this as holding that a violation of the “unfair” prong of the UCL can arise from conduct other than conduct that would violate the antitrust laws.

Most relevant here, the court strongly cautioned against imposing liability for conduct that would not otherwise be an antitrust violation because “[c]ourts must not prohibit ‘vigorous competition’ nor ‘render illegal any decision by a firm to cut prices in order to increase market share.”  Id. at 189 (quoting Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 116 (1986)).  Doing so would lead to a harmful and improper incongruity between the UCL and the antitrust laws.

By the same token, in Chavez a California Court of Appeals held:

If the same conduct is alleged to be both an antitrust violation and an “unfair” business act or practice for the same reason—because it unreasonably restrains competition and harms consumer—the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not “unfair” toward consumers. To permit a separate inquiry into essentially the same question under the unfair competition law would only invite conflict and uncertainty and could lead to the enjoining of procompetitive conduct.

113 Cal. Rptr. 2d at 184.  The panel asserts that this admonition is limited only to “categorical antitrust rule[s].”  Epic Games, Inc. v. Apple, Inc., 67 F.4th 946, 1001 (9th Cir. 2023).  But California’s Second District Court of Appeals clarified that:

[w]e do not hold that in all circumstances an “unfair” business act or practice must violate an antitrust law to be actionable under the unfair competition law.  Instead we hold that conduct alleged to be “unfair” because it unreasonably restrains competition and harms consumers, such as the resale price maintenance agreement alleged here, is not “unfair” if the conduct is deemed reasonable and condoned under the antitrust laws.

Chavez, 113 Cal. Rptr. 2d at 184.

II.           Apple’s Anti-Steering Provisions Cannot Be Unfair as a Matter of Law

The litigation at hand is a case-study on why conduct that is procompetitive should not be enjoined under the UCL.

Apple’s Guidelines included two types of anti-steering provisions that were aimed at preventing third-party apps from directing customers to purchasing mechanisms other than Apple’s IAP: (1) a prohibition on links or buttons within third-party apps; and (2) a prohibition on targeted communications outside of the apps.

Apple has deleted (2) as part of the Cameron v. Apple Inc. settlement, meaning that developers are now free to communicate outside of the apps about external purchasing options (or anything else).  See Order: Granting Mot. for Final Approval of Class Action Settlement; Granting in Part and Denying in Part Mot. for Attorney’s Fees, Costs, and Service Award; and Judgment at 12, No. 19-cv-03074 (N.D. Cal. June 10, 2022).  What remains is the prohibition on links and buttons within apps.  The question is therefore whether such a prohibition is unfair within the meaning of the UCL.

A.            Unfairness under the UCL

The panel claims that the California Supreme Court has identified two tests to assess liability under the UCL’s “unfair” prong: “First, to support ‘any finding of unfairness to competitors,’ a court uses the ‘tethering’ test . . . .  Second, to support a finding of unfairness to consumers, a court uses the balancing test . . . .”  Epic Games, 67 F.4th at 1000 (citations omitted).

But it is incorrect that the California Supreme Court has identified these two tests; rather, the California Supreme Court identified only the tethering test and left unsettled whether there should be a separate test for claims brought by consumers.  Cel-Tech, 20 Cal. 4th at 187 n.12 (“This case involves an action by a competitor alleging anticompetitive practices. Our discussion and this test are limited to that context.  Nothing we say relates to actions by consumers . . . .”).

Despite the confusion generated by the Cel-Tech court’s failure to provide a test for consumer-initiated claims under the UCL, ultimately it should not matter whether the case is resolved under the tethering test or the balancing test.  As discussed above, the aim of both the antitrust laws and UMC laws is to promote consumer welfare by protecting competition—regardless of whether the underlying conduct is in the first instance “unfair” to consumers or competitors.  See Cel-Tech, 20 Cal. 4th at 186 (noting the aim of the test it enumerates to identify unfairness to competitors is “to promote consumer protection”); see also id. at 206 (Kennard, J. concurring and dissenting) (“The purpose of competition is to drive prices down.  Although the unfair competition law protects competitors, even under the majority’s definition it does not protect competitors at the expense of competition.”).

Thus, while the evidentiary basis for claims brought by different parties may be distinct, the ultimate test of harm is not: finding injury to consumers.  But even on this point, the supposed differences between the two tests are largely formalistic.  The so-called “balancing test,” which the panel asserts should apply to unfairness claims brought by consumers, is effectively the same as the burden-shifting, rule-of-reason assessment under antitrust law—which is similarly reflected in the “tethering test” applied to claims brought by competitors.

The anti-steering provisions therefore cannot be considered substantially injurious to consumers because it has already been established that consumers on the whole benefit from Apple requiring the use of its IAP.

B.            UMC under Claims Brought by Competitors

Unfairness to competitors is explicitly resolved through the “tethering test,” which asks whether the defendant’s conduct “threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.”  Cel-Tech, 20 Cal. 4th at 186-87.

Any of these three bases for liability implicates harm to consumers, which antitrust law generally defines in terms of reduced output or increased prices for consumers.  The first basis for finding unfairness—an incipient violation of an antitrust law—concerns conduct that has not yet harmed consumers but is almost certain to do so in the future.

The second basis—the “policy or spirit” of antitrust law provision—is violated when conduct results in “effects [that] are comparable to or the same as a violation of” antitrust law.  Id. at 187.  Under this provision, whether anyone labels the challenged conduct an antitrust violation is irrelevant; instead, what matters is whether the conduct results in the same anticompetitive effects as an antitrust violation, and courts should pursue this inquiry as they would any other inquiry into the competitive effects of challenged conduct.

The third basis—conduct that “otherwise significantly threatens or harms competition”—is a catch-all meant to capture conduct that is permitted under the antitrust laws but nevertheless results in harm to competition.  The most obvious such circumstance is the very one assessed in Cel-Tech where the defendant was given a privileged legal status in the market at issue, and the threat was to a specifically defined form of competition under other laws or regulatory policies.

Accordingly, to resolve the question of whether Apple’s anti-steering provision is unfair, an inquiry must be made into whether the conduct has anticompetitive effects—i.e., whether it harms consumers by reducing output without concomitant procompetitive benefits—or whether it would, if left unchecked, likely develop into such an infringement.

C.            The Answer to the “Unfairness” Question Is Anticipated by the Findings under Antitrust Law

In rejecting Epic’s claims under federal antitrust law, the district court and the panel have effectively foreclosed an unfairness claim under the UCL.

The panel found that Apple’s walled-garden iOS, which prohibits third-party IAPs and app stores, did not violate federal antitrust laws because of its pro-competitive benefits: i.e., increased user privacy and security that could not be achieved through less restrictive means and that ultimately increased inter-brand competition between Apple’s iOS and its closest competitor, Android.  In parallel, however, the panel concluded that Apple’s anti-steering provisions, which prohibit apps from informing users about payment possibilities other than IAP, were unfair under the UCL.

In other words, Apple remains free to prohibit third-party IAPs based on the findings of procompetitive benefits, yet, at the same time, Apple is enjoined from prohibiting links or buttons to third-party payment mechanisms—a less-restrictive means of furthering the same objective.  The two holdings cannot be reconciled.

The prohibition of links and buttons within the app is an enforcement mechanism for the prohibition of third-party IAPs.  If Apple is allowed to require its own IAP on security and privacy grounds, then surely prohibiting apps from encouraging users to bypass Apple’s IAP—by directing consumers to alternative payment methods which may be less secure or private—supports those same procompetitive benefits that the courts recognized.  Other courts have correctly concluded that the same conduct cannot be both procompetitive and unfair.  See Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1124 (9th Cir. 2018); City of San Jose v. Off. of the Comm’r of Baseball, 776 F.3d 686, 691-92 (9th Cir. 2015).

While the anti-steering provision and the requirement that Apple’s IAP be used are not technically identical, they are both instrumental to achieving the same objective.  Thus, even if the Ninth Circuit’s conclusions under federal antitrust law on the IAP were not sufficient to automatically preclude a UMC claim related to the anti-steering provisions, an independent analysis under the UCL should—if done properly—reach the same conclusion: Apple’s anti-steering provisions, like its IAP exclusivity requirement, are procompetitive, do not harm competition, and therefore cannot be considered unfair.

Furthermore, despite the panel’s assertion that its finding of legality under the Sherman Act did not mean that Apple’s conduct was “categorically” permitted under Cel-Tech, Epic Games, 2023 U.S. App. LEXIS 9775, at *96-97, it is settled case-law that, in the absence of any purpose to create or maintain a monopoly, Apple has a “categorical” right to choose with whom it does business.  See, e.g., Trinko, 540 U.S. at 408; Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 448 (2009); Chavez, 113 Cal. Rptr. 2d at 182-83.  “The antitrust laws [do] not impose a duty on [firms] . . . to assist [competitors] . . . to ‘survive or expand.’”  Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 545 (9th Cir. 1983) (citations omitted).  Apple is under no obligation to facilitate third-party payment options—much less if this jeopardizes the integrity of its iOS.

CONCLUSION

For the foregoing reasons, this Court should grant Apple’s rehearing request to clarify that Apple’s conduct violated neither the antitrust laws nor the UCL.

[1] ICLE represents that no party’s counsel authored this brief in whole or in part, no party or party’s counsel contributed money that was intended to fund preparing or submitting the brief, and no person—other than ICLE and its counsel—contributed money that was intended to fund preparing or submitting the brief.  ICLE files this brief pursuant with consent of all parties.

[2] This is reflected in the UCL’s language prohibiting “unlawful” conduct.  See Cel-Tech, 20 Cal. 4th at 180 (“By proscribing ‘any unlawful’ business practice, ‘[the UCL] “borrows” violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable.”) (citations omitted).

[3] It is worth noting that the dissenting opinion in Cel-Tech takes issue with the majority’s decision that the “unfair” prong of the UCL means anything other than “deceptive.”  Under this reading of the UCL, of course, there would be no basis for the district court or the panel’s finding that Apple’s conduct violated the UCL.  See Cel-Tech, 20 Cal. 4th at 192 (Kennard J. dissenting) (“The purpose of the legal prohibitions against unfair business acts and practices, by contrast, is to prevent deceptive conduct that injures a particular competitor.”).

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Antitrust & Consumer Protection

ICLE Amicus in Carr v Google

Amicus Brief INTEREST OF AMICUS CURIAE The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center committed to developing the . . .

INTEREST OF AMICUS CURIAE

The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center committed to developing the intellectual foundations for sensible, economically grounded policy.  ICLE promotes the use of law and economics methodologies, and economic findings, to inform public policy, and has longstanding expertise in antitrust law.

ICLE has an interest in ensuring that antitrust law promotes the public interest and consumer welfare by remaining grounded in sensible rules informed by sound economic analysis.  This includes ensuring that courts and agencies correctly apply the standards for class certification in antitrust cases involving two-sided transaction platforms.[1]

Amicus is authorized to file this brief by Fed. R. App. P. 29(a)(2) because all parties have consented to its filing.

RULE 29(a)(4)(e) STATEMENT

Amicus hereby states that no party’s counsel authored this brief in whole or in part; that no party or party’s counsel contributed money that was intended to fund the preparation or submission of the brief; and that no person other than amicus or its counsel contributed money that was intended to fund the preparation or submission of the brief.

INTRODUCTION AND SUMMARY OF ARGUMENT

The aim of the federal antitrust laws is to protect competition and the innovation and value-creation that it fosters.  To that end, a wide range of entities are authorized to prosecute antitrust claims provided they meet the standards that the legislature and courts have articulated to prevent over-enforcement, which itself can mute competitive incentives and dampen innovation.  Those standards include the prerequisites of standing and, in the case of class actions, commonality and predominance.

In this case, plaintiffs have asked to pursue antitrust claims against Google, a 26-year-old company—younger than the average PhD student—that has transformed the way consumers interact with the internet, increased efficiency, and created immeasurable value.  Plaintiffs assert that “Google illegally monopolized the Android app distribution market”—which the District Court characterized as a two-sided platform—“with anticompetitive practices in the Google Play Store.”  1-ER-3, 10.  They have further asked to proceed as a class, representing 21 million consumers who entered into distinct transactions with various developers related to (in aggregate) 300,000 apps.  Defs.-Appellants’ Br. (“Br.”) at 20.

The value of a two-sided platform to both consumers and sellers depends on the platform successfully balancing their relative interests, demands, and capacity.  That distinctive aspect of two-sided platforms makes questions about standing (such as injury) and the predominance of common issues particularly complex.

On November 28, 2022, the District Court granted class certification, relying on Illinois Brick v. Illinois, 431 US. 720 (1977), and Apple v. Pepper, 139 S. Ct. 1514 (2019), for the proposition that all 21 million consumers were “direct purchasers” and therefore a purported overcharge to the developer must necessarily also injure them.  1-ER-18–19.  It further found a “pass-through” formula was sufficient “class-wide proof of antitrust impact and injury.”  1-ER-19.  In reaching this conclusion, the District Court failed to engage meaningfully and rigorously with the economic realities of two-sided platforms.

In its landmark Apple v. Pepper decision, the Supreme Court held that consumers could be considered “direct purchasers” of a two-sided platform even though developers set the retail prices for apps.  139 S. Ct. at 1520 (“It is undisputed that the iPhone owners bought the apps directly from Apple.  Therefore, under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization.”).  In other words, such consumers were not so remote from the platform as to be barred from bringing suit for lack of standing.  But status as a “direct purchaser” does not categorically mean that plaintiffs have met the requirements of Article III standing.  “Direct purchasers” from two-sided platforms must still show that, as compared to a but-for-world platform using a different price structure, they have been adversely affected.

The Supreme Court in Ohio v. American Express emphasized this point.  Noting first that “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities,” are “generally disfavored in antitrust law” (Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285 (2018) (quoting Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 466–67 (1992)), it found that “[P]rice increases on one side of the platform . . . do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.”

Id. at 2287.  In other words, given the unique dynamics of two-sided platforms, the existence and quanta of injury to consumers cannot be assessed without considering whether a “price” change—including quality parameters such as convenience and security—feeds through the indirect network effects[2] running from one side of the platform to another to alter the relative value of the platform to users and then, assuming that it does, determining which (if any) users are adversely affected.

Plaintiffs skipped over this complexity, instead relying on inapplicable supply-and-demand assumptions and focusing on the pass-through of a single price term.  A suit by consumers against a platform based on products priced by developers necessarily invokes a much more complicated interaction:

Apple’s overall pricing structure includes a component whereby Apple allows app developers to set app prices, but it also includes relevant prices and terms set by Apple, including: the price of iOS devices; the commission charged to app developers; the price of its own iOS apps; the (unavoidable) ability for app developers to charge for services outside of the iOS ecosystem (without paying the thirty percent commission); and the structure, price, and availability of app marketing in the App Store.[3]

It is not enough to show that developers are charged higher fees; or even that developers could charge higher prices to app consumers.  Instead, Plaintiffs must assess both the price effects and non-price quality dimensions.

As things stand, however, plaintiffs focus solely on the costs of Google’s behavior—i.e., the purportedly higher Play Store fees—ignoring how it contributes to making the Android ecosystem safer and of higher quality (both of which boost participation on both sides of the market).  Put differently, plaintiffs’ mistake is to narrowly focus on the effect that Google’s behavior has on Play Store fees, while ignoring how it benefits the broader Android ecosystem and how it may affect individual participants.

In short, plaintiffs have not met their burden of showing that common issues of injury will predominate over individualized inquiries; among other things, they have not offered an analysis rigorous enough to determine whether any members of the putative class were injured, let alone the majority of them.  Accordingly, the District Court’s class certification order should be reversed.

ARGUMENT

I.              Standing Cannot Be Presumed Based on Status as a “Direct Purchaser”

A plaintiff must establish standing to bring a lawsuit in federal court.  Spokeo, Inc. v. Robins, 578 U.S. 330 (2016).  The minimum of Article III standing requires that the plaintiff has “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.”  Id.  The standing requirement applies just as equally to a “direct purchaser” plaintiff as it does to any other plaintiff.  Where the “direct purchaser” is engaging with a two-sided platform—which is how the District Court treated plaintiffs and the purported Android App Distribution market in this matter[4]—questions about injury and the traceability of such can be particularly complex.

Here, however, the District Court failed to rigorously engage with that complexity, suggesting instead that because it had classified consumers as “direct purchasers”, they per force suffered an injury from the service fees that Google charged to developers:

Google’s monopolistic practices inflated the “headline rate” that was used as the basis for all developers’ negotiations with Google, which affected all of the prices set by the developers and paid by consumers to Google.

1-ER-23.  Reasoning that “[t]he overcharge has not been passed on by anyone to anyone” and “consumer plaintiffs paid the alleged overcharge directly to Google,” the District Court concluded that “there is no barrier to certification on this score.”  1-ER-18–19.

But, as discussed further in Section II below, just because a consumer is a “direct purchaser” on one side of a two-sided platform does not mean that the consumer paid any share of a purported overcharge.  Rather, the relevant question is whether the retail prices that plaintiffs paid for the apps and associated services—prices that are set by the developers—were higher than they would have been in the but-for world, accounting for quality parameters such as safety and convenience.   The Supreme Court’s decision in Apple v. Pepper is instructive on this point.  There, the Supreme Court found that the absence of an intermediary between Apple’s app store and its consumers was sufficient to find the latter to be “direct purchasers” in the “retail market for the sale of apps.”  139 S. Ct. at 1521.  In other words, under the framework articulated by the Supreme Court in Illinois Brick Co. v. Illinois, 431 US. 720 (1977), such consumers were not so remote from the purported antitrust violation as to be barred from suit.  In reaching this decision, the Court rejected the notion that the directness of the purchasing relationship should be defined by who sets the price, i.e., consumers can be the “direct purchasers” of a firm that does not set the retail price of a good or service.  Id. at 1522.

However, the Court was also crystal clear that the directness of the payment relationship did not mean that the consumer had in fact paid an overcharge, explicitly distinguishing between app store commissions (or fees) and the app prices paid by consumers:

To be sure, if the monopolistic retailer’s conduct has not caused the consumer to pay a higher-than-competitive price, then the plaintiff’s damages will be zero. Here, for example, if the competitive commission rate were 10 percent rather than 30 percent but Apple could prove that app developers in a 10 percent commission system would always set a higher price such that consumers would pay the same retail price regardless of whether Apple’s commission was 10 percent or 30 percent, then the consumers’ damages would presumably be zero.

139 S. Ct. at 1523.[5]  That is, the Court declined to assume that higher fees charged to app developers necessarily were passed on to consumers through the retail price set by the developer.  The Court in Apple v. Pepper understood that the effects of a hypothetical anticompetitive fee increase may be shared between developers and consumers, with each group needing to show how it was affected to prove their claims.  In the case of consumers, this means showing that the increased fees charged to developers resulted in a worse outcome for consumers.

Apple v. Pepper thus invites a “pass on” inquiry (though fee incidence may actually be the more appropriate terminology), including whether a fee increase has negatively affected a plaintiff, which in turn depends on whether developers have passed on the increased fees to users and whether consumer benefits derived from platform fees (e.g., increased security) outweigh those costs.  Indeed, that is the direct and anticipated consequence of the Court’s decision in Apple v. Pepper.  In its ruling, the Court intentionally opened the door to such allocation questions:

It is true that Apple’s alleged anticompetitive conduct may leave Apple subject to multiple suits by different plaintiffs. . . .The consumers seek damages based on the difference between the price they paid and the competitive price.  The app developers would seek lost profits that they could have earned in a competitive retail market.

139 S. Ct. at 1525.  See also id. at 1526 (Gorsuch, J. dissenting) (“Illinois Brick held that these convoluted ‘pass on’ theories of damages violate traditional principles of proximate causation and that the right plaintiff to bring suit is the one on whom the overcharge immediately and surely fell.  Yet today the Court lets a pass-on case proceed.”).

In short, Apple v. Pepper does not create a presumption that potentially anticompetitive fee increases always injure direct purchasers in the platform context.  Consequently, it was incumbent on the District Court to analyze rigorously whether plaintiffs could demonstrate that purported supracompetitive fees charged to developers caused changes to the value of the platform that injured consumers and that common questions regarding such injury predominate over individualized inquiries.  See Bowerman v. Field Asset Services, Inc., 60 F.4th 459, 469 (9th Cir. 2023) (explaining that “class certification is inappropriate ‘when individualized questions . . . will overwhelm common ones,” and decertifying class based on predominance of individual questions over common ones.).  As discussed below, the District Court erred by failing to grapple with the economic reality of two-sided platforms.

II.           Two-sided Platform “Direct Purchasers” Cannot Demonstrate Injury, and Therefore Standing, Without Adequately Accounting for Indirect Network Effects

It is well recognized that “antitrust law should look at the ‘the economic reality of the relevant transactions’ rather than ‘formal conceptions of contract law.’” ((Apple, Inc. v. Pepper, 139 S. Ct. at 1529–30 (Gorsuch, J. dissenting) (cleaned up)). [6]  Here, that means that plaintiffs cannot demonstrate injury without accounting for the dynamics of a two-sided platform, i.e., how altering the fees charged to developers may trigger feedback effects between the two sides of the platform to change the balance of features and ultimately affect consumers:

[T]here is no meaningful economic relationship between benefits and costs on each side of the market considered alone . . ., any analysis of social welfare must account for the pricing level, the pricing structure, and the feasible alternatives for getting all sides on board.[7]

Plaintiffs’ narrow focus on pass-through of a single price term (or as the District Court termed it, “share of the overcharge,” 1-ER-19) fell short of this analysis, particularly under the standard required by Rule 23.

A two-sided platform is a business model that creates value by reducing the transaction costs of direct interactions between two or more types of users in ways that mere resellers cannot replicate.[8]  A critical feature of multi-sided platforms is that the demand of platform participants is interdependent—the extent of participation by one set of users on a platform depends on the participation of one or more other sets of users.[9]  A multi-sided platform uses both pricing and design choices to achieve critical mass. Without critical mass on all sides, the positive feedback effect, which enables the platform’s unique matching abilities, cannot be achieved.  Further, interdependent demand on platforms often leads to situations where efficient pricing may involve below marginal cost pricing on one side and above marginal cost pricing on another.[10]  As a result, inferences drawn from the traditional indicia of competition—price and output effects—may be inapposite, particularly when they are assessed on only one side of a multi-sided market or without consideration of the effects on the design of the platform itself.

It is a well-accepted proposition in the literature that vertical restraints on multi-sided platforms can be procompetitive, anticompetitive, or competitively neutral depending on a host of complicated interactions among the various groups of platform users and between users and the platform itself.  Procompetitive vertical restraints on multi-sided platforms may fall into one or more of at least three broad categories: (1) achieving economies of scale that provide benefits to consumers overall; (2) helping platforms deal with coordination and expectation problems to the benefit of platform users; and (3) providing benefits to one side of the platform that increase consumer welfare overall.[11]  These procompetitive effects are a function of the particular structure of such two-sided markets and necessitate adjustments to antitrust doctrine to ensure that presumptions and evidentiary burdens properly reflect the more complicated economic relationships among the parties involved.

Plaintiffs and their experts failed to fully account for these dynamics in their analysis.  For example, Dr. Singer mistakenly surmises that lower fees would result in more consumer demand because:

A foundational principle in economics is that “demand curves” are downward sloping—meaning that, all else equal, consumers will demand more of a product or service the lower its price.  How much more will be demanded depends on the consumer elasticity of the demand response to lower prices for Apps and In-App Content.

Dkt. 252-3 at 125.[12]  Similarly, he concludes that the supply of apps and in-app content would increase if Google’s service fees were reduced and the developers received more revenue:  “Absent the Challenged Conduct, developers would realize larger proceeds, which would bring forward more App and In-App Content development, commensurate with a shifting out of the supply curve.”  Id.  And he makes these claims while explicitly excluding considerations of quality effects.  Dkt. 252-3 at 74 n. 368 (“Although my primary impact focuses on price effects (over the take rate) it is possible that competition would occur on non-price quality dimensions as well.”).  Moreover, when he does acknowledge that competition can occur on the quality dimension, he neglects entirely the possibility of quality (design) changes in the platform itself.  Id. at 108.

This approach is wrong for two important reasons.  The first is that lower service fees to the developer do not necessarily translate into lower retail prices to the consumer, as the real-world evidence demonstrated.  Br. at 39–41.  More fundamentally, the intuition that lower prices result in higher demand does not always hold in two-sided markets.  For example, if the fee structure encourages participation from developers on the other side of the market, then that may lead to higher user demand.  Likewise, if higher developer fees or a particular fee structure facilitate platform design choices that improve quality for users (and/or developers), that, too, may stimulate user demand.  In short, the simple reallocation of costs and benefits across the sides of a two-sided market can be output increasing, output reducing, or output neutral.  Looking solely at price effects simply cannot distinguish between these scenarios.

This is why the Supreme Court in Ohio v. American Express emphasized that the legal analysis of injury in a two-sided market requires consideration of both sides of the platform: “Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.”  138 S. Ct. at 2286 (internal citation omitted). “Competition,” it declared, “cannot be accurately assessed by looking at only one side of the platform in isolation.”  Id. at 2287.

The notion that prices charged on one side have an ambiguous effect on demand on the other is one of the central findings of the economic literature regarding two-sided markets, because the “quality” of the final product is intrinsically connected to the other side of the market.  In their highly influential work, Jean-Charles Rochet and Nobel prize winner Jean Tirole observed that:

We define a two-sided market as one in which the volume of transactions between end-users depends on the structure and not only on the overall level of the fees charged by the platform.[13]

They also highlight that the basic, “canonical” model they develop is an important starting place to understand the relationships between sides of a two-sided market, but it is not a description of reality, and a proper analysis must go beyond narrow price considerations.[14]  As a result, “policy interventions to alter the price structure (as opposed to the price level)” are not likely to be “solidly grounded.”[15]  Indeed, as Andre Hagiu has shown:

[I]n all of these articles, the volume of transactions . . . is not directly affected by platforms’ prices: Rochet and Tirole and Armstrong essentially assume that each member of one side interacts with an exogenously given proportion of members on the other side. . . . In my model the variable fees charged by the platform (royalties) play a central role, because they affect the prices and volumes of trade between sellers and buyers and therefore social welfare. On the other hand, the allocation of the royalties among the two sides is largely inconsequential in my model.[16]

The “canonical” assumption of a fixed quantity and ratio of users is inapt where, as here, users decide whether to join the platform at different times and consume its services in varying amounts.  Any assessment of the effects of a revised price structure would require a complete analysis across relevant metrics of the optimal balancing of demand on both sides of the market under the new structure.[17]

But here, Plaintiffs and the District Court discounted non-fee metrics:

Google says that class members may be worse off in plaintiffs’ but-for world because Google may have to change its current practices to stay competitive by cutting back on services it currently offers for free. In Google’s view, ‘in a world without existing Android security standards, security-conscious consumers would be worse off because they would face costs to keep their data and devices secure.’ Concerns like these are far too speculative and conditional to be a serious barrier to certification.

1-ER-25 (internal citations omitted).  This conclusion ignores the fact that, in two-sided platforms, what might superficially appear to be a fee increase on one side may in fact be a crucial component of the underlying ecosystem:

Where a single, two-sided product is at issue, the price may be spread across users on both sides of the market. Moreover, non-price product characteristics will necessarily differ between different sets of users. . . Given the differential incidence of price and quality across a platform, it is impossible to capture the competitive dynamics and to measure the competitive effects by viewing only the partial price on one side.[18]

It is thus impossible to assess whether a particular participant on the platform has been injured without considering how the change affects the platform as a whole and, to the extent that there is an anticompetitive effect, which side (or sides) and which participants within that side (or sides) are worse off.

In sum, the District Court was wrong to conclude plaintiffs could assert injury based on a purported overcharge in service fees to one side of the platform without fully analyzing the price and non-price feedback between the two sides of the platform.

III.        Injury Cannot Be Assumed from Anticompetitive Harm to a Subset of Heterogenous Two-Sided Platform “Direct Purchasers”

Plaintiffs, and ultimately the District Court, further err by assuming that the complicated effects of a change to the platform is directionally the same for all consumers.

The first problem is (as discussed above) that antitrust injury cannot be inferred from consideration of only a partial price change, particularly in the context of a platform relationship.  Because users are heterogenous across many dimensions, the assumption of anticompetitive effect (let alone commonality across users) from a price change for a subset of consumers is particularly hard to maintain.

This is not just a consequence of the two-sided nature of the market at issue. Consider, for example, the basic principle that harm to a particular competitor—even the loss of a particular competitor—is not the same thing as harm to competition.  See Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962).  One necessary implication of this principle is that it is not enough to show harm to “inframarginal” consumers or to a particularly sensitive subset of consumers, because, for some of these consumers—say, those with strong brand loyalty to a particular firm—the loss of their preferred competitor would also harm them, even if competition itself were not affected.  Holding otherwise would undermine this fundamental limitation on the scope of antitrust injury.  Because this distinction between harm to some consumers and anticompetitive harm is so crucial to ferreting out conduct that creates or maintains monopoly power, antitrust law requires a demonstration that the conduct at issue has an actual anticompetitive effect—not merely that it results in some harm—before a case may be brought.

This is a fundamental tenet of antitrust law and economics, but it is particularly magnified in the platform setting.  There, because operators are optimizing the platform for the benefit of multiple groups of users on multiple sides of a multi-sided market, superficial harm to one group may well be part of an overall optimization strategy, and injury cannot be assumed on the basis of harm to a subset of users.  Most obviously, apps and app prices are embedded in a broader ecosystem and are instrumental to its value—as Plaintiffs’ expert even understands (without acknowledging its significance):

The functionality and user enjoyment derived from a mobile device is highly dependent upon the range and quality of apps available on it. In addition to producing a mobile operating system, Google has created a distribution channel for delivery of Android-compatible apps developed by third parties, and developed its own universe of Apps, for Google Android. Google itself has developed some of the most popular Android- and iOS-compatible apps, including Google Search, Google Maps, Chrome, YouTube, and Gmail.

Dkt. 252-3, at 10.

Indeed, restrictions in one dimension may not even constitute “harm” to that subset of consumers where it is accompanied by corresponding benefits, for instance where the restrictions serve to protect consumers’ privacy and data or to assure adequate monetization and distribution.  Platform users can benefit from features that contribute to the overall success of the ecosystem.[19]  In other words, higher prices may reflect higher quality—stemming directly from the very conduct that Plaintiffs claim is the source of injury.

Second, even if one ignores the concept of virtuous feedback loops, Plaintiffs’ claim that all class members are negatively affected still falls flat.  Consumers are not similarly situated, and it is inappropriate to assume a simple pro rata effect from a change in app store prices.  Game apps account for an enormous percentage of app store purchases, and “spending on the consumer side is also primarily concentrated on a narrow subset of consumers: namely, exorbitantly high spending gamers. . . . 81.4% of all Apple accounts spent nothing and account for zero percent of the App Store billings for the quarter. . . , [and] 6% of App Store gaming customers in 2017 accounted for 88% of all App Store game billings. . . .”  Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d 898, 953–54 (N.D. Cal. 2021).[20]  Without analyzing whether and how the reduction in fees charged to developers affects other costs associated with the platform—either direct costs or indirect costs through reduced quality—it cannot be assumed that even those consumers who make purchases in the Play Store are worse off.  Moreover, because user groups vary along other dimensions that are likely to correlate with price—most notably in terms of their sensitivity to privacy and security risks and their tolerance of user-interface impediments like ads or “choice screens”—the effects of price reductions or increases accompanied by other qualitative changes are not captured by price, vary considerably across users, and are not likely to correlate with pro rata app usage.  Any inquiry into injury will turn on these individualized questions.

CONCLUSION

For the reasons stated above, the District Court’s class certification order should be reversed.

[1] In a two-sided market a firm sells two different products or services to two different groups of consumers. See Filistrucchi et al., Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293 (2014) (“In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets….”).

[2] Bruno Jullien, Alessandro Pavan, & Mark Rysman, Two-sided Markets, Pricing, and Network Effects, 4 Handbook of Industrial Organization 488 (2021) (“[I]ndirect network effects . . . emerge when the adoption and use of a product leads to increased provision of complementary products and services, with the value of adopting the original product increasing with the provision of such complementary goods . . . Indirect network effects thus lead to a feedback loop as more participants on each side of the platform find it more valuable to adopt and use the platform when they expect the other side to attract more users.”)

[3] Geoffrey A. Manne and Kristian Stout, The Evolution of Antitrust Doctrine After Ohio v. Amex and the Apple v. Pepper Decision That Should Have Been, 98 Neb. L. Rev. 425, 458 (2019).

[4] We understand that there are summary judgment motions pending regarding whether plaintiffs have properly defined a market involving the sale of in-app purchases (IAPs) and subscriptions to consumers because: (1) “Plaintiffs’ experts have conceded that their alleged Android app distribution market does not involve IAPs or subscriptions at all”; and (2) “according to plaintiffs’ experts,” the other putative relevant market involves Google selling in-app billing services to developers.  No. 3:21-md-02981-JD, Dkt. 480, at 18.  We do not take any position on these issues.

[5] To draw an analogy with physical retail, the harm to consumers that buy from a retail cartel is the difference between the competitive and cartel price of the goods they purchase, not the increase to those retailers’ margins under monopoly.  This distinction has important ramifications for two-sided markets and the case at hand.

[6] Manne & Stout, supra note 3, at 458 (referencing both Ohio v. Amex and Apple v. Pepper and emphasizing “the need for the plaintiffs . . . to allege injury and present their prima facie case consistently with the economic realities of the two-sided market at issue”).

[7] David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. Reg. 325, 355–56 (2003).

[8] For a more thorough discussion of the nature of two-sided platforms, see generally David S. Evans & Richard Schmalensee, The Antitrust Analysis of Multisided Platform Businesses, Oxford Handbook On International Antitrust Economics (Roger Blair & Daniel Sokol eds., 2013).

[9] See, e.g., David S. Evans, Economics of Vertical Restraints for Multi-Sided Platforms (Univ. of Chi. Inst. for Law & Econ. Olin Res. Paper No. 626, Jan. 2, 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2195778 [https://perma.unl.edu/T5CP-QECW], at 4.

[10] See Evans & Schmalensee, supra note 8, at 6.

[11] See Evans, supra note 9, at 8–10.

[12] Unless otherwise noted, references to “Dkt” refer to No. 3:21-md-02981-JD.

[13] Jean-Charles Rochet & Jean Tirole, Two-sided Markets: A Progress Report, 37 The RAND J. of Econ. 646 (2010).

[14] Id. at 663.

[15] Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. of the Eur. Econ. Ass’n 1009 (2003).

[16] Andre Hagiu, Pricing and Commitment by Two-Sided Platforms, 37 RAND J. of Econ. 720, 722 (2006)

[17] See, e.g., Benjamin Klein, et al., Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73 Antitrust L.J. 571, 598 (2006) (“The economic theory of two-sided markets indicates that relative prices on the two sides of the market are independent of the degree of competition faced by a supplier in such a market. While total prices will be influenced by competition, relative prices are determined by optimal balancing of demand on the two sides of the market.”).

[18] Geoffrey A. Manne, In Defence of the Supreme Court’s “Single Market” Definition in Ohio v. American Express, 7 J. Antitrust Enf. 104, 109 (2019).

[19] See Dirk Auer, Appropriability and the European Commission’s Android Investigation, 23 Colum. J. Eur. L. 647 (2017).

[20] As the court in Epic v. Apple notes, the Google Play Store appears to have similar characteristics.  Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d at 954 n. 243.

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Antitrust & Consumer Protection

The EU Might Just Break the Internet

Popular Media Bad competition cases are a dime a dozen these days. The UK Competition and Markets Authority’s (CMA) recent unfortunate decisions to block both Microsoft’s acquisition of . . .

Bad competition cases are a dime a dozen these days. The UK Competition and Markets Authority’s (CMA) recent unfortunate decisions to block both Microsoft’s acquisition of Activision Blizzard and Meta’s takeover of Giphy spring to mind as examples of a competition enforcer prioritising populist “big is bad” concerns.

And yet, in the race to bring the most reckless competition case, the European Commission takes the crown, most recently accusing Google of abusing its dominant position in the online-advertising market. According to the competition watchdog, the issue is that Google favours its own ad exchange (i.e. a platform that matches advertisers with publisher websites) over rivals, thereby harming competition and consumers.

Read the full piece here.

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Antitrust & Consumer Protection

Comments from the International Center of Law and Economics on The Future of Competition Policy in Canada

Written Testimonies & Filings Executive Summary In what the Discussion Paper refers to as a “moment of reckoning” for competition law, it is crucial that the Government not overreact . . .

Executive Summary

In what the Discussion Paper refers to as a “moment of reckoning” for competition law, it is crucial that the Government not overreact with experimental legislative reform that will later be exceedingly difficult to unwind. Five main conclusions can be drawn from this submission, and they warrant a much more restrained approach.

First, the Government should follow several important guiding principles when it decides what competition policy is appropriate for Canada. Any potential reform should be based on careful examination of the facts and evidence, as well as the specifics of Canada’s economy, and it should be scrupulous in applying the error-costs framework. In addition, despite frequent rhetoric to the contrary, it is entirely unclear that “digital” markets present the sort of unique challenges that would necessitate an overhaul of the Competition Act. Accordingly, evidence does not recommend that Canada follow the sort of competition regulation or reform contemplated elsewhere, nor should Canada be compelled to act just because other countries are “doing something.”

Second, there is no rhyme or reason to presumptions against self-preferencing behavior. Self-preferencing is normal business conduct that can, and often does, yield procompetitive benefits, including efficiencies, enhanced economies of scope, and an improved products for consumers. In addition, a ban on self-preferencing would cause harms for the startup ecosystem by discouraging acquisitions by large firms, which would ultimately diminish the incentives for startups. This is presumably not what the Government wants to achieve.

Third, altering the purpose of the Competition Act would be a grave mistake. Competition law does not serve to protect competitors, but competition; nor can harm to competitors be equated with harm to competition. The quintessential task of competition laws—the Competition Act included—is distinguishing between the two, precisely because the distinction is so subtle, yet at the same time so significant. Similarly, “fairness” is a poor lodestar for competition-law enforcement because of its inherent ambiguity. Instead of these or other standards, the Competition Act should remain rooted in the principle of combating “a substantial lessening or prevention of competition.”

Fourth, the Government should exercise extreme caution in its exploration of labour-market monopsony, as altering the merger-control rules to encompass harms to labour risks both harming consumer welfare and the consistency and predictability of competition law.

Fifth, in its impetus to bolster competition-law enforcement by making it “easier” on the Canadian Competition Bureau, the Government should not sacrifice rights of defense and the rule of law for expediency. In this, at least, it can learn from the example of the EU’s Digital Market Act.

Introduction

We thank the Government of Canada for the opportunity to comment on its Consultation on the future of competition policy in Canada. The International Center for Law and Economics (ICLE) is a non-profit, nonpartisan research center whose work promotes the use of law & economics methodologies to inform public-policy debates. We believe that intellectually rigorous, data-driven analysis will lead to efficient policy solutions that promote consumer welfare and global economic growth. ICLE’s scholars have written extensively on competition and consumer-protection policy. Some of our writings are included as references in the comment below. Additional materials may be found at our website: www.laweconcenter.org.

On 17 November 2022, the Canadian Government (“Government”) published a Consultation for the Future of Competition Policy in Canada (“Consultation”) with the purpose of informing the Government’s next steps for improving competition in emerging and digital markets, including potential legislative changes (Government of Canada, 2022). The Consultation builds on a Discussion Paper issued by the Canadian Competition Bureau (“CCB”) entitled “The Future of Competition Policy in Canada” (“Discussion Paper”) which broaches several issues that have been hotly debated, both in Canada and abroad, such as so-called “killer acquisitions,” self-preferencing practices by dominant online platforms, the effects of monopsony power on labour, private damages claims, the necessity of bolstering antitrust enforcement, and deceptive marketing practices (Discussion Paper: 5). While all these questions undoubtedly deserve extensive commentary, we have decided to focus on five issues where we think our expertise in law and economics, as well as our experience in the regulation of digital markets, bring the most added value.

These comments are organized as follows. In Section I, we outline several general principles that guide any effective competition policy, especially in the realm of digital markets. We argue that sound competition policy needs to account for the economic specificities of the jurisdiction that passes it, the significant heterogeneity of digital platforms, and the important error costs associated with regulating digital markets. In Section II we argue that Canada should not follow the EU in imposing outright bans and ex ante obligations for conduct that is ubiquitous in the digital world, such as self-preferencing. We argue, instead, that there are legitimate reasons—ranging from economic efficiency to safety, privacy, and security—to prefer a more restrained, case-by-case approach. We also connect the skepticism toward self-preferencing with a broader, misguided belief that vertical integration is typically anticompetitive, which is not supported by the available evidence.

In Section III, we argue against a range of proposals that would, in one way or another, alter the purpose clause of the Competition Act. We emphasize that competition law serves to protect competition, not competitors; caution against the reliance on amorphous concepts, such as “fairness,” to guide competition-law enforcement; and hold that merger control should remain tethered to a standard of “substantial lessening or prevention of competition.” In Section IV, we explain that, while it may appear politically expedient and attractive, there are serious limits on the extent to which labour effects can be integrated into competition analysis.

Finally, Section V warns against sacrificing effective procedural safeguards and rights of defense for the sake of facilitating enforcement. More generally, we warn against the increasingly prevalent intuition that making enforcement easier is always good, effective, or costless; or that “more enforcement” is synonymous with the public good. Section VI concludes.

I.        Some General Principles for Effective Competition Policy

When done well, competition policy can provide the governing framework for free enterprise—a set of rules that prevent the formation of inefficient monopolies, while allowing markets to deliver benefits to consumers unfettered by heavy-handed government intervention. To achieve this goal, it is essential for competition policy to be grounded in several principles that ensure it achieves a balance between over- and under-deterrence of harmful conduct. These principles include having a competition policy that fits the specific needs and market realities of the jurisdiction enforcing it; ensuring that competition policy is mindful of error-cost considerations; and avoiding a one-size-fits-all approach that treats all markets, notably digital ones, as identical.

A.      Canada Should Implement the Right Competition Rules for Canada

The Consultation appears to assume that Canada’s adversarial system of competition-law enforcement is too archaic to deal with competition issues arising in the modern, digital economy (Ibid: 51), and that Canada is falling behind the regulatory trends set by “international partners,” such as the United States, Australia, and the European Union.

“[The Government] is committed to a renewed role for the Competition Bureau in protecting the public in our modern marketplace, in line with steps taken by many of Canada’s key international partners” (Ibid: 4).

While these trends exist—despite significant variation in terms of scope and legislative progress across jurisdictions—there is currently a dearth of evidence to suggest that they are a positive development worthy of emulation. It is even less clear whether emulating these developments would be the right move, given Canada’s specific market realities.

The EU’s Digital Markets Act (“DMA”), the most comprehensive legislative attempt to “rein in” digital companies, entered into force only last October, and it will not start imposing obligations on gatekeepers until February or March 2024 at the earliest. (Grafunder et al., 2022). Nevertheless, its sponsors have predictably touted it as a resounding success and a landmark piece of legislation that will upend the ways in which digital platforms do business. The press has also wasted no time in lionizing the EU’s regulatory pièce de résistance as a “victory” over tech companies, as if the relationship between business and government were a zero-sum game (Abend, 2015; Harris, 2022).

But it is important to carefully consider the facts and evidence. Indeed, while the DMA likely will transform how the targeted companies do business (albeit possibly not in the way the regulation’s supporters assume), the jury is still very much out on the question of whether the DMA is, or will be, a success. The DMA’s origins are enlightening in this regard. Prior to its adoption, many leading European politicians touted the text as a protectionist industrial-policy tool that would hinder U.S. firms to the benefit of European rivals—a far cry from the purely consumer-centric tool it is sometimes made out to be. French Minister of the Economy Bruno Le Maire acknowledged as much, saying (Pollet, 2021): “Digital giants are not just nice companies with whom we need to cooperate, they are rivals, rivals of the states that do not respect our economic rules, which must therefore be regulated… There is no political sovereignty without technological sovereignty. You cannot claim sovereignty if your 5G networks are Chinese, if your satellites are American, if your launchers are Russian and if all the products are imported from outside.”

Andreas Schwab, one of the DMA’s most important backers in the European Parliament, likewise argued that the DMA should focus on non-European firms (Broadbent, 2021): “Let’s focus first on the biggest problems, on the biggest bottlenecks. Let’s go down the line—one, two, three, four, five—and maybe six with Alibaba. But let’s not start with number seven to include a European gatekeeper just to please [U.S. president Joe] Biden.”

Even on its own terms, whether the DMA will achieve its dual goals of “fairness” and contestability is uncertain. Less certain still is whether it will produce negative unintended consequences for consumer prices, product quality, security, innovation, or the rule of law—as some commentators have warned (Auer & Radic, 2023; Barczentewicz, 2022; Colangelo, 2023; Radic, 2022; Ibáñez Colomo, 2021; Cennamo & Santaló, 2023; Bentata, 2021). In a similar vein, no evidence suggests that the competition-law cases against tech companies based on such theories of harm as self-preferencing will withstand the courts’ scrutiny or that they will result in net benefits to consumers or competition.

The still nascent “trends” in other jurisdictions offer even less in terms of evidence to counsel adoption of far-reaching DMA-style solutions like banning self-preferencing, forcing interoperability, or prohibiting the use of data generated by business users. The U.S. antitrust bills targeting a handful of companies seem unlikely to be adopted soon (Kelly, 2022); the UK’s Digital Markets Unit proposal has still not been put to Parliament; and Japan and South Korea have imposed codes of conduct only in narrow areas. The mere prevalence of trends—especially at a tentative stage—is not, on its own, indicative, much less dispositive, of the appropriateness of a regulatory response. It should therefore be treated neutrally by the Government, not with deference.

Second, the Discussion Paper fails to adequately grapple with the possibility that the EU’s regulatory response might not be well-suited to the Canadian context. For one, Canada’s economy is one-eighth as large as the EU’s (Koop, 2022), meaning that it is much less likely to be seen as an essential market by those companies affected by any potential antitrust/regulatory reform. Thus, while the EU can perhaps afford to impose costly and burdensome regulation on digital companies because it has considerable leverage to ensure—with some, though by no means absolute, certainty—that those companies will not desert the European market, Canada’s position is comparatively more precarious. In addition, the EU has an idiosyncratic digital strategy that has produced no notable digital platforms, with the arguable exceptions of Spotify and Booking.com, and has instead shifted its attention almost entirely to redistributing rents across the supply chain from those digital platforms that have emerged (Manne and Radic, 2022; Manne and Auer, 2019). Even staunch supporters of the DMA have admitted that the DMA will do nothing to help the EU produce its own platforms to challenge the dominant U.S. firms (Caffarra, 2022) . The DMA and the European Commission’s recent flurry of cases against U.S. tech companies are arguably an integral part of that overarching strategy.

B.      Regulation Should Be Scrupulously Mindful of Error Costs

With rare exceptions, the Discussion Paper does not sufficiently acknowledge that regulation is neither free of risk nor costless to implement. Legal decision making and enforcement under uncertainty are, however, always difficult, and always potentially costly. The risk of error is always present, given the limits of knowledge, but it is magnified by the precedential nature of judicial decisions: an erroneous outcome affects not only the parties to a particular case, but also all subsequent economic actors operating in “the shadow of the law” (Manne, 2020a). The uncertainty inherent in judicial decision making is further exacerbated in the competition context, where liability turns on the difficult-to-discern economic effects of challenged conduct. This difficulty is magnified further still when competition decisions are made in innovative, fast-moving, poorly understood, or novel market settings—attributes that aptly describe today’s digital economy (Ibid.).

More specifically, Type I errors—i.e., enforcement of the rules against benign or beneficial conduct—might mean reducing firms’ incentives to make investments in areas where free-riding is seen by competitors as a viable strategy (Auer, 2021), thereby reshaping the products that consumers enjoy (such as Apple’s walled-garden iOS model, Canales 2023; Sohn, 2023; Auer, Manne & Radic, 2022); diminishing quality; or driving up prices (on this last point, see Section II). Where the possibility and likelihood of these costs is not brought into the equation, regulations will exceed the social optimum, to the harm of consumers, taxpayers, and, ultimately, society. To be sure, this is not to say that no regulation or legal reform should ever be undertaken; it is only to say that they should be undertaken within the error-cost framework.

When it comes to considering competition reform, the Government must be careful not to conflate correlation with causation. On several occasions, the Discussion Paper connects certain exogenous phenomena with anemic competition enforcement or a lack of significant competition reform since the 1980s (Discussion Paper: 6-7, 15). While the connection is made rhetorically explicit, however, the Discussion Paper provides no arguments or sources to support it. For instance, it is unclear that heightened competition enforcement would have mitigated the impact of the COVID-19 pandemic or that it attenuates economic inequality, as the Discussion Paper implies. Economic evidence and respect for the rule of law, rather than political expediency, should be the forces driving reform. Lastly, and more generally, if the objectives of the Competition Act are going to be stretched beyond their current understanding to encompass considerations extrinsic to competition—such as protecting the “social landscape and democracy” (Ibid: 7)—a much broader legislative reform is needed. That, in turn, would necessitate substantively more empirical research than the anecdotal evidence currently available on, say, the relationship between economic concentration and un-democratic outcomes (as well as tighter definitions of democracy) (Manne & Stapp, 2019; Stapp, 2019; Manne & Radic, 2022). In this connection, we have often cautioned against a “Swiss Army knife” approach to competition, in favor of tethering it to one quantifiable standard that it is best-placed to deliver (and which is expressly recognised in the Competition Act): providing consumers with competitive prices and product choices (Manne, 2022a; Manne & Hurwitz, 2018). After all, if, as the Discussion Paper suggests, the current iteration of the Competition Act, which focuses specifically on lower prices and product quality for consumers, has not contributed enough to drive down the costs of living for Canadians, why give it more wildly ambitious goals?

The danger here is threefold. The Competition Act may fail in achieving these ulterior goals; it may, by diluting the importance of prices and product quality for consumers, perform even more poorly at lowering the costs of living; and, lastly, the legal uncertainty resulting from the imposition of a quagmire of conflicting goals may chill efficient conduct (see Section III).

C.      ‘Digital Markets’ Are Not Inherently Prone to Market Failure

While any market or industry may be distinctive in certain regards, it is not at all established that digital markets are so distinctive to warrant special treatment under the competition rules—much less to justify new legislation. The Discussion Paper assumes, as has become increasingly popular, that digital markets are marked as special because of their data-driven network effects or extreme returns to scale. (Discussion Paper: 8-9) (Cremer, de Montjoye, & Schweitzer, 2019; Zingales & Lancieri, 2019). The Government, however, should at least contemplate the counterarguments to this assertion.

From the outset, it is worth noting that there is arguably no such thing as a “digital” market. Put differently, every market today—from higher education to supermarkets—employs some level of digital technology, which renders the label “digital” largely superfluous. The flipside of this is that some markets typically seen as the epitome of “digital” rely heavily on physical infrastructure. Online sales platforms like Amazon, for instance, sell physical products, stored in warehouses, through a distribution network made up of a fleet of trucks and planes. Both observations undercut the claim that digital markets embody a distinct kind of competition, and one that can be parsed from markets across the Canadian economy.

More fundamentally, digital markets are arguably less prone to “tipping”—i.e., the emergence of runaway leaders whose competitive advantage can no longer be eroded because of their large userbases—than is generally assumed. The value of data in creating network effects is significantly overestimated. It is important to note that network effects, on the one hand, and economies of scope and scale, on the other, are distinct economic phenomena. Whereas economies of scope and scale reflect cost-side savings, network effects “operate through user benefits enhancement as production increases. Network effects are therefore a reflection of consumers’ perception of value” (Tucker, 2019). While there is a common assumption that acquiring sufficient data and expertise is essential to compete in data-heavy industries, the “learning by doing” advantage of data rapidly reaches a point of diminishing returns, as do advantages of scale and scope in data assets (Manne & Auer, 2021). Critics who argue that firms such as Amazon, Google, and Facebook are successful because of their superior access to data have the causality in reverse. Arguably, it is because these firms have come up with successful industry-defining paradigms that they have amassed so much data, and not the other way around. Indeed, Facebook managed to build a highly successful platform  relative to established rivals like MySpace (Jacobs, 2015).

Third, and relatedly, network effects in digital markets are rarely insurmountable. Several scholars in recent years have called for more muscular antitrust intervention in networked industries on grounds that network externalities, switching costs, and data-related increasing returns to scale lead to inefficient consumer lock-in and raise entry barriers for potential rivals (Discussion Paper: 23). But network effects can also be highly local. “For example, when I consider whether to use Dropbox or another file sharing service, I do not care about the total number of users of Dropbox; instead, I care about how many of my handful of collaborators also use it” (Tucker, 2019). Thus, network effects tend to destabilize market power: “[w]hile network effects facilitate the rapid growth of platforms, they also accelerate their demise.”(Ibid.)

There are countless examples of firms that easily have overcome potential barriers to entry and network externalities, ultimately disrupting incumbents. Recently, Zoom outcompeted long-established firms with vast client bases and far deeper pockets, such as Microsoft, Cisco, and Google, despite the video-communications market exhibiting several traits typically associated with the existence of network effects (Auer, 2019).[1] Other notable examples include the demise of Yahoo, the disruption of early instant-messaging applications and websites, and MySpace’s rapid decline. In each of these cases, outcomes did not match the predictions of theoretical models (Manne & Stapp, 2019).

More recently, TikTok’s rapid rise offers perhaps the greatest example of a potentially superior social-networking platform taking significant market share away from incumbents. According to the Financial Times, TikTok’s video-sharing capabilities and powerful algorithm are the most likely explanations for its success (Nicolaou, 2019). While these developments certainly do not disprove network-effects theory, they eviscerate the belief, common in antitrust circles, that superior rivals cannot overthrow incumbents in digital markets.

Of course, this will not always be the case. The question is ultimately one of comparing institutions—i.e., do markets lead to more or fewer error costs than government intervention? Yet this question is systematically omitted from most policy discussions (Auer, 2022).

Lastly, the widespread assumption that critical, large-scale data are exclusive to a few companies, who then misuse it to distort competition and exclude rivals, is largely unfounded. Data are widely used by a range of industries—not just “digital” services—and they are, or can be, the source of important procompetitive benefits. This is not sufficiently recognized in the Discussion Paper, which instead views data almost exclusively as a “currency” and a barrier to entry that serves to entrench market power. In fact, data can serve to drive innovation, optimize costs, and respond to rapidly changing consumer tastes—among other things (Manne & Auer, 2020: 1355). For instance, data in online search enable customers to find more (and more relevant) products and to compare product quality and price, especially using online reviews. Similarly, e-commerce enables consumers in more remote and thinly populated areas to obtain goods and services that were previously hard to access. Assuming that data are principally a barrier to entry erected to exclude rivals, that access to data should therefore be restricted for certain companies, or that the data at their disposal should be diluted, is not only fundamentally wrong, but also likely to harm consumers.

II.      Canada Should Not Introduce DMA-Style Per Se Prohibitions, nor a Presumption of Illegality for Self-Preferencing

In its section on abuse of dominance, the Discussion Paper toys with the idea of imposing per se prohibitions or presumptions of anticompetitive harm on certain unilateral conduct, notably self-preferencing (Discussion Paper, 2022:31-32). This wariness of self-preferencing is echoed by several scholars, not least Vass Bednar and her co-authors (2022: 28), who argue that:

“In a fair, competitive market, products may come to dominate markets by virtue of being superior to those of competitors in quality, price, or some other characteristic. However, through self-preferencing market operators may gain dominance in specific markets due to the fact that they operate and control how information is presented in the marketplace in which they sell their product. In this way, self-preferencing can undermine the competitive dynamic of these markets, leading to poorer market outcomes. Self-preferencing constitutes an advantage that is not based on the merits of competition, but instead the degree of dominance that the self-preferencing firm has in another market.”

Admittedly, some jurisdictions, including the EU, have prohibited dominant platforms outright from giving preferential treatment to their own products (see, e.g., Article 6(5) of the DMA). But as argued in the previous section, this says nothing on its own about whether Canada should follow suit. Accordingly, Canadian authorities should consider the actual costs and benefits of self-preferencing before they adopt sweeping prohibitions of this sort of conduct.

A.      Self-Preferencing Is Not Presumptively Harmful

Courts and regulators in other countries have recognized that self-preferencing can have important pro-competitive justifications. As the Fifth Interim Report of the Digital Platform Service Inquiry of the Australian Consumer and Competition Commission states:

The ACCC recognises that there may be legitimate justifications for some types of self-preferencing conduct, such as promoting efficiency, or addressing security or privacy concerns, which would need to be carefully considered in developing new obligations. Any new obligations to prevent self-preferencing should be tailored to address specific conduct likely to harm competition, rather than amounting to a broad prohibition on any and all selfpreferencing by Designated Digital Platforms (2020: 131).

Indeed, many companies’ business models, from supermarkets to consultancy firms (Moss, 2022), are based on various forms of vertical integration, which includes self-preferencing (Sokol, 2023). In the specific context of online platforms, self-preferencing allows companies to improve the value of their core products and to earn returns so that they have reason to continue investing in their development (Andrei Hagiu, Tat-How Teh, & Julian Wright , 2022; Manne & Bowman, 2020). The EU’s ban on self-preferencing does not contradict this: it merely indicates that, under the DMA, procompetitive justifications and efficiencies are deemed irrelevant—a blunt approach that the Government might reasonably want to avoid.

One important reason why self-preferencing is often procompetitive is that platforms have an incentive to maximize the value of their entire product ecosystem, which includes both the core platform and the services attached to it. Platforms that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product. Those that preference inferior products end up hurting their attractiveness to users of their “core” product, exposing themselves to competition from rivals. (Manne, 2020b).

Along similar lines, the notion that it is harmful (notably to innovation) when platforms enter competition with edge providers is unfounded. Indeed, a range of studies show that the opposite is likely true. Platform competition is more complicated than simple theories of vertical discrimination would have it, and there is certainly no basis for a presumption of harm (Manne, 2020c).

To cite just a few supportive examples from the empirical literature: Li and Agarwal found that Facebook’s integration of Instagram led to a significant increase in user demand, both for Instagram itself and for the entire category of photography apps. Instagram’s integration with Facebook increased consumer awareness of photography apps, which benefited independent developers, as well as Facebook (Li & Agarwal, 2016). Foerderer et al. found that Google’s 2015 entry into the market for photography apps on Android created additional user attention and demand for such apps generally. (Foerderer et al., 2018). Cennamo et al. found that video games offered by console firms often become blockbusters and expand the consoles’ installed base. As a result, these games expand the opportunities for independent game developers, even in the face of competition from first-party games (Cennamo, Ozalp, Kretschmer, 2018). That is, self-preferencing can confer benefits—even net benefits—on competing services, including third-party merchants. Finally, while some have suggested that Zhu and Liu (2018) demonstrate harm from Amazon’s competition with third-party sellers on its platform, the study’s findings are far from clear-cut. As co-author Feng Zhu noted in the Journal of Economics & Management Strategy: “[I]f Amazon’s entries attract more consumers, the expanded customer base could incentivize more third?party sellers to join the platform. As a result, the long-term effects for consumers of Amazon’s entry are not clear” (Zhu, 2018).

The ambivalent effects of self-preferencing are no less true when platforms use data from their services to compete against edge providers. Indeed, critics have argued that it is unfair to third parties using digital platforms to allow the platform’s owner to use the data gathered from its service to design new products, when third parties do not have equal access to that data. That seemingly intuitive complaint was, e.g., the basis for the European Commission’s landmark case against Google (see T-604/18, Google v. Comm’n, 2022 ECLI:EU:T:2022:541). But we cannot assume that conduct harms competition simply because it harms certain competitors (see also Section IIIB). Unambiguously procompetitive conduct, such as price-cutting and product improvements, similarly put competitors at a disadvantage. Improvements to a digital platform’s service may be superior (or preferred) to alternatives provided by the platform’s third-party sellers, and therefore procompetitive and beneficial to consumers. The alleged harm in such cases is the burden of having to compete with goods and service offerings that offer lower prices, higher quality, or both.

Finally, prohibiting companies from self-preferencing or significantly constraining their ability to do so could damage the entire venture-capital-backed ecosystem. In discouraging vertical integration, large companies will have diminished incentives to acquire startups; and those startups in turn will have less incentives to exist (Manne, 2022b). As pointed out recently by Daniel Sokol: “Without the ability to ‘self preference,’ companies will be less willing to acquire new businesses and technologies. The combination of weaker incentives for acquisition along with the inability to use contractual self preferencing will reduce scope economies and integration efficiencies” (Sokol, 2023).

The point applies equally to a firm’s internal investments: that is, a firm might invest in developing a successful platform and ecosystem because it expects to recoup some of that investment through, among other means, preferred treatment for some of its own products. And exercising a measure of control over downstream or adjacent products might drive the platform’s development in the first place. In sum, a hardline approach to self-preferencing would harm consumers, stifle innovation, and disrupt the startup ecosystem. There is also insufficient evidence to justify a presumption of harm or shifting the burden of proof to defendants.

B.      Vertical Integration and the Self-Fulfilling Prophecy of Self-Preferencing

At the most basic level, the misplaced condemnation of self-preferencing stems from another, earlier myth that recently has had a resurgence: the notion that vertical integration is commonly anticompetitive. Indeed, vertical conduct by digital firms—whether through mergers or through contract and unilateral action—frequently arouses the ire of critics of the current antitrust regime. Many critics point to a few recent studies that cast doubt on the ubiquity of benefits from vertical integration. But the findings of those studies are easily—and often—overstated. There is considerably more empirical evidence that vertical integration tends to be competitively benign. This includes widely acclaimed work by economists Margaret Slade and Francine Lafontaine (former director of the Federal Trade Commission’s Bureau of Economics under President Barack Obama), whose meta-analysis of vertical transactions led them to conclude:

[U]nder most circumstances, profit-maximizing vertical integration decisions are efficient, not just from the firms’ but also from the consumers’ points of view. Although there are isolated studies that contradict this claim, the vast majority support it. Moreover, even in industries that are highly concentrated so that horizontal considerations assume substantial importance, the net effect of vertical integration appears to be positive in many instances. We therefore conclude that, faced with a vertical arrangement, the burden of evidence should be placed on competition authorities to demonstrate that that arrangement is harmful before the practice is attacked (Lafontaine & Slade, 2007: 629).

Similarly, a study of vertical restraints by Cooper et al. (2005)—former FTC economists, including a former director of the FTC’s Bureau of Economics and three FTC deputy directors (two former and one current)—finds that “[e]mpirically, vertical restraints appear to reduce price and/or increase output. Thus, absent a good natural experiment to evaluate a particular restraint’s effect, an optimal policy places a heavy burden on plaintiffs to show that a restraint is anticompetitive.” As O’Brien (2008) observed, the literature suggests that diverse vertical practices “have been used to mitigate double marginalization and induce demand increasing activities by retailers. With few exceptions, the literature does not support the view that these practices are used for anticompetitive reasons.”

Subsequent research has tended to reinforce these findings. Reviewing the literature from 2009-18, Lipsky et al. (2018),  conclude that more recent studies “continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets (Lipsky et al., 2018: 8).”

Ultimately, the notions that self-preferencing and vertical integration are anticompetitive reinforce each other. Self-preferencing purportedly exemplifies why vertical integration is (or can be) harmful, as only companies that are vertically integrated engage in self-preferencing. At the same time, calls to ban or limit self-preferencing are built on the unsubstantiated intuition that vertical integration itself is generally harmful, which is likely why the negative effects of self-preferencing are summarily presumed, despite a lack of clear and convincing evidence to that effect. The circular logic is evident and fallacious.

None of this is to suggest that proposed vertical mergers should not be subject to scrutiny, or that vertical restraints ought to be per se lawful. It is, in fact, possible for vertical mergers or other vertical conduct to harm competition, and vertical conduct—both unilateral and concerted—should remain subject to fact-specific, rule-of-reason inquiry into its effects on competition and consumers. Evidence does not, however, suggest a general skepticism of vertical integration is merited, and nor does it support a fundamental change in the competition standards or presumptions that apply to vertical integration (Fruits, Manne, & Stout, 2020: 950). As discussed in the previous sub-section, it also does not substantiate a presumption of illegality or a per se prohibition on self-preferencing.

III.    Repurposing the Purpose Clause: Antitrust Should Remain Grounded in Robust Effects Analysis and Efficiencies Should Remain a Viable Defense

There is a clear impetus in the Discussion Paper to degrade, if not shun entirely, evidence of procompetitive effects and efficiency considerations in the context of antitrust enforcement. For example, it is suggested that the Competition Act’s Purpose Clause should be reframed as protecting “fair competition,” with “less focus on competitive effects,” and that this reframing would be in the interest of achieving a “level playing field” (Discussion Paper: 38). The Discussion Paper also proposes broadening the definition of “anti-competitive act” for the purpose of abuse of dominance to ensure that it includes harm toward a competitor, not just to competition (lbid: 17). In a similar vein, efficiencies are consistently framed as an obstacle to the Government’s ability to block “potentially harmful” deals, rather than as instances where government intervention should rightly be avoided (lbid: 5).

The Discussion Paper also appears to suggest, albeit less explicitly, the possibility of lowering the evidentiary standard of proof for merger review from “substantial lessening or prevention of competition” to a more enforcer-friendly “appreciable risk” of lessening competition (lbid: 23).  While the combined effect of these proposals would surely be to make enforcement easier for the Bureau, a point we discuss in Section IV, there are also concrete, substantive harms associated with abandoning longstanding competition standards.

A.      Competition Law Serves to Protect Competition, not Competitors

Antitrust law does not serve to protect competitors—only to protect competition. As courts have long recognized, the natural process of competition is such that it results in some companies inevitably abandoning the market. But this is not a flaw to be corrected through antitrust enforcement; it is the central feature of competition. Indeed, as the European Court of Justice has repeatedly held in a well-established line of case-law:

Not every exclusionary effect is necessarily detrimental to competition (see, by analogy, TeliaSonera Sverige, paragraph 43). Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation (Case C 209/10 Post Danmark, EU:C:2012:172, para 22).

Repurposing competition law to protect all competitors, rather than competition itself, vitiates the essence of antitrust law, rendering it, and competition, pointless. Indeed, at the most essential level, the purpose of the competition rules is to distinguish between conduct that anticompetitively serves to exclude competitors, on the one hand, and competition on the merits that may lead firms to exit the market, on the other. While even first-year law students intuitively understand this critical distinction, it can prove challenging to distinguish between the two in real-world cases. The reason is simple: anticompetitive foreclosure and competition on the merits both ultimately result in the same observable outcome—that rivals exit the market. To draw the line, antitrust enforcers and policymakers have developed a wealth of tools to infer both the root causes and the effects of firms’ market exit, such as, e.g., the “as efficient competitor test” in the EU (Auer & Radic, 2023).

Blurring this subtle but crucial conceptual boundary by reorienting the Competition Act toward the protection of competitors would also have serious economic ramifications. By artificially retarding or foreclosing firm exit, the Competition Act would have the perverse effect of encouraging free-riding, discouraging efficient firm behavior and, ultimately, harming consumers and the economy as a whole.

B.      “Fairness” Is Not a Useful Goal for Antitrust Law—or Regulation, for that Matter

Fairness is not a foreign concept to antitrust law, and fairness considerations are not new to it (Colangelo, 2023). Its perennial allure lies in the evocation of principles of equality and justice with which few would disagree. (Who, after all, is in favor of “unfairness?”)

The problem lies in the inherent ambiguity of the concept, which makes it much more valuable as a rhetorical device—albeit a politically attractive one—than a working, quantifiable threshold of anticompetitive conduct. Under traditional liberal notions of fairness, understood as equality before the law, the case for redistributing rents away from dominant digital companies—especially where such dominance has resulted from a superior business model, management, and/or product-design decisions—is comparatively weak. On the other hand, if fairness is understood as equality of outcome, then ensuring that rents generated by digital platforms are distributed equally across the supply chain and horizontally to competitors suddenly becomes more defensible.

This conceptual fuzziness is exacerbated by the existence of multiple sets of stakeholders, which diminishes the possibility of identifying “fair” outcomes for any given group. Thus, what may seem like “fair” compensation for access to a platform and customer base from the perspective of, e.g., app developers, may not seem “fair” to the platforms that have invested time, research, and money into developing such a platform, or to low-usage consumers who may be asked to pay more for their devices to compensate developers whose apps they don’t use.

The use of fairness as either a goal of competition policy or a standard to adjudicate antitrust disputes inevitably raises complicated value judgements: Which group should competition authorities favor; what definition of “fairness” should enforcers mobilize; and, more fundamentally, should competition authorities be empowered to make such value-laden judgments in the first place? Contemporary competition policy has traditionally steered clear of these largely intractable questions (Ibid: 12). As the Discussion Paper rightly indicates, the Competition Act “does not proactively dictate how to conduct business, allocate resources among stakeholders, or designate participants, winners or losers in the free market (Discussion Paper: 13).”

And yet, under the inherent uncertainty of a DMA-style fairness standard, the Bureau would inevitably be forced to do just that—whether it wanted to or not. This would subvert the entire edifice of Canadian competition law, ensconcing a new standard as the system’s lodestar with entirely unpredictable material consequences. It would also, and perhaps even more importantly, signal a shift away from the rule of law and toward government discretion, transforming the Bureau from an executive enforcer of the law to a social engineer. Ironically, for all the talk about market concentration and democracy, the inverse relationship between unfettered government discretion and democracy is much better understood, and historically accounted for, than the supposed link between market concentration and undemocratic outcomes (Hayek, 2007, 2011; Mises, 2014; Friedman, 2002).

C.      Merger Control Should Remain Tethered to a “Substantial Lessening or Prevention of Competition” Principle

The Discussion Paper notes that “[o]ne of the antitrust reform bills before the U.S. Senate would modify the legal test for merger intervention from substantial lessening of competition to ‘an appreciable risk of materially lessening competition’” (Discussion Paper: 23). Specifically, the Discussion Paper identifies the U.S. bill’s proposal that the burden of proof for certain mergers be reversed, based on, e.g., increases in concentration, the size of the merger (valuations exceeding US$5 billion), or the identity (and presumed dominance) of the acquiring firm (Ibid). In the alternative, it is suggested that there be a more stringent competition test or reporting threshold for certain sensitive sectors. While the question of the best competition policy for Canada remains paramount, it is worth noting that the U.S. bill was not enacted by the U.S. Congress, and for good reasons.

1.     Industry concentration, firm size and mergers

As a background matter, the Government should consider that some of the concerns motivating the failed U.S. legislation stemmed from potentially misleading characterizations of concentration across U.S. industries. Of signal influence was a 2016 brief issued by then-President Barack Obama’s Council of Economic Advisors (“CEA”) (White House, 2016). As observed by Carl Shapiro—a former Obama CEA member and a former chief economist at the U.S. Justice Department’s Antitrust Division—certain statements in the exhibits and the text were potentially (and, for many, actually) misleading:

[S]imply as a matter of measurement, the Economic Census data that are being used to measure trends in concentration do not allow one to measure concentration in relevant antitrust markets, i.e., for the products and locations over which competition actually occurs. As a result, it is far from clear that the reported changes in concentration over time are informative regarding changes in competition over time (Shapiro, 2018: 727-28).

Shapiro did not deny that changes in concentration in specific markets could be concerning. Rather, he pointed out that key indicators in the CEA issue brief were not relevant to competition analysis.  For example, cited concentration ratios were far higher than any that should flag competition concerns, and identified industry groupings were far too broad to assess market power in any specific markets (Ibid: 721-722). At bottom: “Industrial organization economists have understood for at least 50 years that it is extremely difficult to measure market concentration across the entire economy in a systematic manner that is both consistent and meaningful (Ibid: 722).”

One approach to assessing the relationship between concentration, profits, and competition is embodied in the Structure-Conduct-Performance (“SCP”) paradigm, which tended to measure concentration by the Herfindahl-Hirschman Index (HHI), and which used specific HHI thresholds for competitive screening or evaluation. But while HHIs may still be used for rough and preliminary screening purposes, merger analysis has—by and large, and for decades—left the SCP framework behind, as both theoretical and empirical work has undermined the approach (Schmalensee, 1989; Evans, Froebd, & Werden, 1993; Berry, 2017; Salinger, 1990; Miller et al., 2022). Industry-specific research has only reinforced the wisdom of rejecting the SCP framework, demonstrating that, e.g., various new screening tools are more accurate than concentration measures in flagging health-care-provider mergers that are potentially anticompetitive (Garmon, 2017).

The “substantial lessening of competition” standard focuses on the question of whether harm to competition has occurred, or is likely to occur, with a focus on actual or likely consequences: harm to consumers, often in terms of increased prices, but also in terms of reduced output and nonprice dimensions of competition, such as lower product quality and diminished convenience or availability. Alternatives tend to be less clear, harmful to consumer welfare, or both.

The suggestion that merger policy should alter its methods or standards according to the size of the firm (or firms) involved recalls the “big is bad” approach to antitrust enforcement prevalent in the first half of the twentieth century. That approach, and the assumption of market power (and harm to competition) had no real economic basis:

In short, there is no well-defined “causal effect of concentration on price,” but rather a set of hypotheses that can explain observed correlations of the joint outcomes of price, measured markups, market share, and concentration. . . .

Our own view, based on the well-established mainstream wisdom in the field of industrial organization for several decades, is that regressions of market outcomes on measures of industry structure like the Herfindahl-Hirschman Index should be given little weight in policy debates (Berry et al., 2019: 48).

Scale is not an accurate proxy for either market power or anticompetitive conduct. To reimplement the big-is-bad approach risks arbitrary impediments to broad categories of procompetitive mergers, and reduced innovation in business models that would benefit consumers. It would protect inefficient (high-cost) producers from precisely the kinds of competitive pressures that competition law is supposed to foster (Manne & Hurwitz, 2018: 1,6).

To be sure, large tech firms’ impressive scale might appear to imply market power; and such firms, among others, may possess a degree of market power in one or another market. Large firms, like small ones, also may engage in anticompetitive conduct. Nonetheless, and especially in the contemporary tech industry, it is “not unusual for efficient, competitive markets to comprise only a few big, innovative firms. Unlike the textbook models of monopoly markets, these markets tend to exhibit extremely high levels of research and development, continual product evolution, frequent entry, almost as frequent exit—and economies of scope and scale (i.e., ‘bigness’). Size simply does not correlate with anything recognizable as ‘consumer harm’” (Ibid).

A presumption against large firms (and large transactions) would necessarily benefit smaller firms, independent of the question of whether they provide consumers with superior or less-costly goods and services. Indeed, some courts have expressly recognized that deciding competition matters for the purpose of favoring small firms entailed that “occasional higher costs and prices might result from the maintenance of fragmented industries and markets” (Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1967)). Such maintenance has always raised the question of which decision standard should be employed, and what its economic basis should be, as well as the rationale for trading consumer welfare for benefits to certain smaller firms. Not incidentally, thresholds recently proposed for presumptively suspect firms or transactions are such that many very large firms escape heightened scrutiny. That includes firms that may have significant market power in one or more markets. And, of course, small firms might well enjoy significant market power in niche markets.

There remain legitimate debates about the optimal methods and standards for competition policy, but the drive toward a consumer welfare standard, begun in the 1960s and 1970s, ultimately identified a coherent and predictable outcome against which to evaluate both specific competition matters and competition policy: greater consumer welfare is achieved through the condemnation of conduct that suppresses innovation, increases prices, or diminishes desirable nonprice dimensions of goods and service, such as quality and convenience. Application of the consumer welfare standard is not always trivial, but it is generally tractable, and increasingly so, as developments in data sources and industrial-organization economics continue.

A recent policy statement by the U.S. Federal Trade Commission (FTC) set a template for the disadvantages of popular reform proposals, with something akin to an “appreciable risk” standard. The FTC had withdrawn its prior Unfair Methods of Competition policy statement and, in doing so, disavowed the consumer welfare standard as “open ended” and capable of delivering “inconsistent and unpredictable results” (Federal Trade Commission, 2021). In its place, the FTC announced a new standard: a prohibition of “unfair” conduct that “tend[s] to negatively affect competitive conditions.”

What that means is not clear. We are told that unfair conduct is “coercive, exploitative, collusive, abusive, deceptive, predatory”—terms that may be evocative in ordinary usage and some of which occur, in dicta, in certain historical U.S. antitrust cases. But those terms have no clear established meaning in Canadian, U.S., or European competition jurisprudence. The statement also declares as unfair any conduct that “involve[s] the use of economic power of a similar nature,” or that “may” be “otherwise restrictive or exclusionary.” That all seems relatively open-ended.

Further, as Gilman and Hurwitz (2022) explain, the phrase “tends to negatively affect competitive conditions” is noteworthy mostly for what it is not. It does not specify either harm to competition or harm to consumers, but rather a tendency (not necessarily a likelihood) to “negatively affect” (perhaps to harm) “competitive conditions.” Thus, we have a sort of any-party-in-the-marketplace standard, concerned with effects on “consumers, workers, or other market participants” and whether conduct “tends to” affect (negatively) any party, and which does not turn to whether the conduct directly caused actual harm in the specific instance at issue. Effects need not be “current” or “measurable” or even “actual.” And they need not be likely.

The new FTC standard is certainly no model of clarity. Establishing “harm to consumers, workers, or other market participants” may be more tractable than establishing harm to consumers. But that’s only because nearly any potential harm to anyone would seem to suffice, no matter the cost to consumers. Indeed, in disclaiming the need to show either actual or likely harm, the relevance of efficiencies, and of relative costs and benefits, the FTC sets the enforcement bar lower still. Whatever degree of unpredictability might attach to the consumer welfare standard, it is impossible to see the FTC’s 2022 proposal as an improvement.

The FTC’s new policy also appears to buy lower administrative costs at the expense of both predictability and, necessarily, consumer welfare. Fundamentally, the FTC ignores completely the problem of error costs. To the extent that competition policy is concerned with consumer welfare, loose (and seemingly arbitrary) standards will lower administrative costs but increase Type 1 errors (false positives) by sometimes condemning procompetitive and benign conduct as anticompetitive. But amorphous standards may also increase Type 2 errors, as enforcement untethered from consumer welfare and economic foundations may well increase the total number of cases and determinations of liability, while missing difficult cases where real harms might have been found through traditional methods.

Thomas Lambert (2021) employs a decision-theoretic framework to compare competing institutional approaches to competition law and, specifically, to address the market power of large digital platforms, both actual and presumed:

(1) the traditional U.S. antitrust approach; (2) imposition of ex ante conduct rules such as those in the EU’s Digital Markets Act and several bills recently advanced by the Judiciary Committee of the U.S. House of Representatives; and (3) ongoing agency oversight, exemplified by the UK’s newly established “Digital Markets Unit.” After identifying the advantages and disadvantages of each approach, this paper examines how they might play out in the context of digital platforms. . . . [and] shows how three features of the agency oversight model—its broad focus, political susceptibility, and perpetual control—render it particularly vulnerable to rent-seeking efforts and agency capture. The paper concludes that antitrust’s downsides (relative indeterminacy and slowness) are likely to be less significant than those of ex ante conduct rules (large error costs resulting from high informational requirements) and ongoing agency oversight (rent-seeking and agency capture) (Lambert, 2021).

2.     Nascent Competition

Finally, some argue that an “appreciable risk” to competitive harm standard would be more appropriate in the context of acquisitions of nascent or potential competitors. The argument is that, by their nature, the risks associated with acquisitions of nascent competitors is more speculative. Since we cannot know for sure, given their current size and scope, we need to account for these risks and have a standard that can incorporate them. The argument is laid out most completely by Steven Salop in his paper Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits. In it, he argues that:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide (Salop, 2021:6).

Taken to its logical conclusion, this approach would support a presumption against any acquisition, because there is always a risk, no matter how remote, that any company could compete with the incumbent in the future. It is unclear how far the qualifier “appreciable” goes toward countering this overly stringent presumption. On this note, it is important to realize that eliminating a potential competitor is not the same thing as eliminating potential competition. The market power of firms, even monopolists, is disciplined by how closely the closest potential competitor is to the incumbent. In the jargon of economics: the marginal competitor matters. How quickly could the marginal competitor enter? How closely could the marginal competitor compete on price?

When there are just two firms in a market, we are confident that the second-largest firm is the marginal competitor for the largest. Once we open consideration to all possible or potential competitors, our ability to know in advance which may provide a disciplinary force greatly decreases. As such, any competition standard needs to recognize such limitations and keep potential-competition challenges to clearly articulated cases.

The FTC’s recent challenge of Meta’s acquisition of Within serves as a natural experiment in showcasing the limits of opening potential-competition challenges to more speculative cases. The FTC’s case rested on arguing that Facebook was a potential competitor to Within’s virtual-reality fitness app Supernatural. While the judge ultimately did not reject the possibility of potential-competition harms, in theory, he rejected the evidence of such harms in this case (Paul Weiss, 2023).

IV.    There Are Serious Limits to Considering the Effects of Mergers on Labour

The Discussion Paper notes “at least two points in the Canadian System where a closer examination of labour effects could occur” (Discussion Paper: 28) Those are, first “in the evaluation of competitive effects, namely as to whether mergers may result in distortions to the labour market, even if there are no harmful competitive effects downstream”; and second, “in the evaluation of efficiencies, in which reduction of labour may be viewed as efficient or pro-competitive” (Ibid.). We recommend the Commission exercise extreme caution in these areas, as both risk harms to consumer welfare, and to the consistency and predictability of competition law.

The Discussion Paper notes “various challenges and pitfalls of applying competition law to labour markets, including, inter alia, the difficulty of integrating the role (and benefits) of technological change and ‘creative destruction,’” complexities in assessing compensation wholistically, and the question of market definition (Discussion Paper: 28). These measurement difficulties exceed those typically observed in product markets and raise questions regarding whether—and if so, how—to account for trade-offs among, e.g., labour interests and pro-consumer efficiencies and innovation in products, production, or distribution, or between labour interests and consumer welfare.

The concerns cited by the Boyer report are important. For one thing, one cannot distinguish between efficiency gains and the exercise of monopsony power if one looks only to price and quantity in an input market, such as labour. Consider a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices (wages) and quantity purchased (hired) of inputs, such as labour. But this same effect (reduced prices/wages and quantities for inputs) could be observed if the merger is efficiency-enhancing. If we assess downstream output, efficiency-enhancing mergers will necessarily be associated with greater output. Efficiencies achieved through innovation in product offerings, production, management, or distribution will lead to increased output. If, on the other hand, the merger increases monopsony power, the post-merger firm will perceive its marginal cost as higher than it was pre-merger, and it will reduce downstream output accordingly (Hemphill & Rose, 2018).

To parse labour markets from downstream product and service markets, and to consider the impact on the latter of “out-of-market” effects, would confound the distinction of efficiency-enhancing mergers from monopsony-creating ones, while simultaneously isolating competition analysis of labour markets from observations of pro-consumer efficiencies. It is unclear whether (and, if so, how) using competition law to discipline alleged harm to labour markets is consistent with the consumer welfare standard, the lodestar of antitrust enforcement, at least as it is currently understood.

Marinescu & Hovenkamp assert that, “[p]roperly defined, the consumer welfare standard applies in exactly the same way to monopsony. Its goal is high output, which comes from the elimination of monopoly power in the purchasing market…. [W]hen consumer welfare is properly defined as targeting monopolistic restrictions on output, it is well suited to address anticompetitive consequences on both the selling and the buying side of markets, and those that affect labor as well as the ones that affect products (Marinescu & Hovenkamp, 2014).”

But there are at least two problems with this reasoning.

First, the assertion that harm to input providers alone should be actionable is based on a tenuous assertion that a mere pecuniary transfer is sufficient to establish anticompetitive harm. As Marinescu and Hovenkamp note “there is merely a transfer away from workers and towards the merging firms. Yet. . . such a transfer is a harm for antitrust law.” (Ibid: 1062) But such harms to labour (and other input suppliers) may benefit consumers. In the typical case, at least some of the benefits of employer leverage (relative advantage in negotiation) are passed along to consumers; in the limit, all such benefits are passed on to consumers (Salop, 2010: 342). The main justification for ignoring such cross-market effects is primarily a pragmatic one, but one considerably diminished by modern analytical methods (Rybnicek & Wright, 2014: 10). Particularly in the context of inputs to a specific output market, these cross-market effects are inextricably linked and hardly beyond calculation.

The assertion that pure pecuniary transfers are actionable is also inconsistent with the fundamental basis for competition law, which seeks to mitigate deadweight loss, not mere pecuniary transfers that do not result in anticompetitive effects (Bork, 2021: 110).

Finally, market definition, too, is a confounding problem for the prospect of labour competition analysis. In monopoly cases, enforcers and courts can face enormous challenges in identifying a relevant market. These challenges are multiplied in input markets—especially labour markets—in which monopsony is alleged. Many inputs are highly substitutable across a wide range of industries, firms, and geographies. For example, changes in technology, such as the development of PEX tubing and quick-connect fittings, allows for labourers and carpenters to perform work previously done exclusively by plumbers. Technological changes have also expanded the relevant market in skilled labour: Remote work during the COVID-19 pandemic, for example, demonstrates that many skilled workers are not bound by geography and compete in national—if not international—labour markets.

At the same time, many labour markets—especially (but not only) lower-wage labour markets—remain local. They have the potential to crosscut both product markets and their associated geographic markets. And both mergers and unilateral conduct can raise questions concerning how to trade harm to labour—e.g., reduced wages, benefits, or jobs—in one locale against benefits in another.

In short, there is a serious knowledge gap to plug before competition authorities can satisfactorily analyze the impact of mergers on labour markets. Until that is the case, competition law would gain by limiting its focus to output markets.

V.      Bolstering the Bureau’s Powers and the ‘Effectiveness’ of Enforcement Should not Come at the Expense of Parties’ Rights of Defense, the Rule of Law, and Procompetitive Outcomes

One of the key themes of the Discussion Paper is “the often-narrow circumstances where the Competition Bureau can intervene (Discussion Paper: 4).” For example, the Discussion Paper laments that bringing abuse-of-dominance cases is currently too burdensome for the CCB and suggests implementing EU-style presumptions (Ibid: 34-35) or substituting the need to show intent and (likely) effects for a mere capability of anticompetitive effects (Ibid: 37).  But the fact that some cases are not easy to bring is not, on its own, a justification for reform (see Section I). Procedural safeguards and burdens of proof exist for a reason: to cabin enforcers’ discretion, ensure that rights of defense and the rule of law are respected, and to minimize errors. Furthermore, “more enforcement” is neither good nor bad. What makes it one or other is contingent on the likelihood and extent of the error costs of intervention vs. non-intervention (see Section IB).

In this way, the EU’s experience warns of the risk of granting to public authorities extensive powers to enforce novel regulations, while treating the rights of defense as an afterthought (Lamadrid, 2022; Auer and Radic, 2023). Like the ethos that undergirds the Discussion Paper, the DMA is propelled by the (dubious) logic that the competition laws in their current form cannot be deployed easily or quickly enough to address the supposedly unique, endemic challenges of “digital” markets (for the opposite view, see Colangelo, 2022).

But this eagerness to intervene at any cost itself comes at a cost. In the EU, for instance, the draft implementing regulation of the DMA (DIR) indulges in serious procedural over-reach, which is likely to have significant ramifications for targeted companies, third parties, and the Commission itself. Thus, from the outset, the DIR makes clear that the Commission prioritizes procedural effectiveness over procedural fairness (Lamadrid, 2022). It establishes a “succinct” (short) right to respond to the Commission’s preliminary findings, thereby abridging parties’ rights to defense in ways that the Commission is not similarly constrained in issuing its preliminary findings.

Procedural rules exist to protect parties from abuses by the administration, as well as to protect the administration from costly and unnecessary litigation. This has been recognized, in one way or another, by the European courts. Just this past year, two marquee decisions were quashed by the European Court of Justice, at least partially because of procedural irregularities: Qualcomm and Intel. The lesson to be learned for the CCB is that, even if the Competition Act is reformed, Canadian law still recognizes robust rights of defense and procedural safeguards that, if breached because of an administrative over-eagerness to “do more,” will be promptly checked by the courts.

VI.    Conclusion

In this “moment of reckoning,” (Discussion Paper: 6) it is crucial that the Government not overreact with experimental legislative reform that will be exceedingly difficult to unwind. Five main conclusions can be drawn from this submission, and they warrant a much more restrained approach. First, the Government should critically reassess the assumptions that underpin the Discussion Paper. Evidence does not recommend that Canada follow the sort of competition regulation or reform contemplated elsewhere, nor should Canada be compelled to act just because other countries are “doing something.” Any potential reform should be based on careful examination of the facts and evidence and should be scrupulous in applying the error-costs framework. In addition, despite frequent rhetoric to the contrary, it is entirely unclear that “digital” markets present the sort of unique challenges that would necessitate an overhaul of the Competition Act.

Second, there is no rhyme or reason to presumptions against self-preferencing behavior. Self-preferencing is normal business conduct that can—and often does—yield procompetitive benefits, including improved economies of scope, greater efficiencies, and improved products for consumers. In addition, a ban on self-preferring could harm the startup ecosystem by discouraging acquisitions by large firms, which would ultimately diminish the incentives for startups. This is presumably not what the Government wants to achieve.

Third, altering the purpose of the Competition Act would be a grave mistake. Competition law does not serve to protect competitors, but competition; nor can harm to competitors be equated with harm to competition. To do so would harm competition and, necessarily, Canadian consumers. The quintessential task of competition laws—the Competition Act included—is to distinguish between the two, precisely because the distinction is so subtle, yet at the same time so significant. Similarly, “fairness” is a poor lodestar for competition-law enforcement because of its inherent ambiguity. Instead of these, or other standards, the Competition Act should remain rooted in the standard of “substantial lessening or prevention of competition.”

Fourth, the Government should exercise extreme caution in addressing labour-market monopsony, as altering the merger-control rules to encompass harms to labour risks both harming consumer welfare and the consistency and predictability of competition law.

Fifth, in its impetus to bolster competition-law enforcement by making it “easier” on the CCB, the Government should not sacrifice rights of defense and the rule of law for expediency. In this, at least, it can learn from the DMA’s example.

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Antitrust & Consumer Protection

Self-Preferencing Theories Need to Account for Exploitative Abuse

Popular Media Self-preferencing by a powerful service provider is usually analyzed as constituting an exclusionary abuse of market power. Examples of this kind of abuse might include . . .

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Antitrust & Consumer Protection

Is the FTC Threatening Efficient Franchise Relationships?

TOTM Franchising plays a key role in promoting American job creation and economic growth. As explained in Forbes (hyperlinks omitted)… Read the full piece here.

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Antitrust & Consumer Protection