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FTC Commissioner Joshua Wright gets his competiton enforcement guidelines

Popular Media Today, for the first time in its 100-year history, the FTC issued enforcement guidelines for cases brought by the agency under the Unfair Methods of . . .

Today, for the first time in its 100-year history, the FTC issued enforcement guidelines for cases brought by the agency under the Unfair Methods of Competition (“UMC”) provisions of Section 5 of the FTC Act.

The Statement of Enforcement Principles represents a significant victory for Commissioner Joshua Wright, who has been a tireless advocate for defining and limiting the scope of the Commission’s UMC authority since before his appointment to the FTC in 2013.

As we’ve noted many times before here at TOTM (including in our UMC Guidelines Blog Symposium), FTC enforcement principles for UMC actions have been in desperate need of clarification. Without any UMC standards, the FTC has been free to leverage its costly adjudication process into settlements (or short-term victories) and businesses have been left in the dark as to what what sorts of conduct might trigger enforcement. Through a series of unadjudicated settlements, UMC unfairness doctrine (such as it is) has remained largely within the province of FTC discretion and without judicial oversight. As a result, and either by design or by accident, UMC never developed a body of law encompassing well-defined goals or principles like antitrust’s consumer welfare standard.

Commissioner Wright has long been at the forefront of the battle to rein in the FTC’s discretion in this area and to promote the rule of law. Soon after joining the Commission, he called for Section 5 guidelines that would constrain UMC enforcement to further consumer welfare, tied to the economically informed analysis of competitive effects developed in antitrust law.

Today’s UMC Statement embodies the essential elements of Commissioner Wright’s proposal. Under the new guidelines:

  1. The Commission will make UMC enforcement decisions based on traditional antitrust principles, including the consumer welfare standard;
  2. Only conduct that would violate the antitrust rule of reason will give rise to enforcement, and the Commission will not bring UMC cases without evidence demonstrating that harm to competition outweighs any efficiency or business justifications for the conduct at issue; and
  3. The Commission commits to the principle that it is more appropriate to bring cases under the antitrust laws than under Section 5 when the conduct at issue could give rise to a cause of action under the antitrust laws. Notably, this doesn’t mean that the agency gets to use UMC when it thinks it might lose under the Sherman or Clayton Acts; rather, it means UMC is meant only to be a gap-filler, to be used when the antitrust statutes don’t apply at all.

Yes, the Statement is a compromise. For instance, there is no safe harbor from UMC enforcement if any cognizable efficiencies are demonstrated, as Commissioner Wright initially proposed.

But by enshrining antitrust law’s consumer welfare standard in future UMC caselaw, by obligating the Commission to assess conduct within the framework of the well-established antitrust rule of reason, and by prioritizing antitrust over UMC when both might apply, the Statement brings UMC law into the world of modern antitrust analysis. This is a huge achievement.

It’s also a huge achievement that a Statement like this one would be introduced by Chairwoman Ramirez. As recently as last year, Ramirez had resisted efforts to impose constraints on the FTC’s UMC enforcement discretion. In a 2014 speech Ramirez said:

I have expressed concern about recent proposals to formulate guidance to try to codify our unfair methods principles for the first time in the Commission’s 100 year history. While I don’t object to guidance in theory, I am less interested in prescribing our future enforcement actions than in describing our broad enforcement principles revealed in our recent precedent.

The “recent precedent” that Ramirez referred to is precisely the set of cases applying UMC to reach antitrust-relevant conduct that led to Commissioner Wright’s efforts. The common law of consent decrees that make up the precedent Ramirez refers to, of course, are not legally binding and provide little more than regurgitated causes of action.

But today, under Congressional pressure and pressure from within the agency led by Commissioner Wright, Chairwoman Ramirez and the other two Democratic commissioners voted for the Statement.

Competitive Effects Analysis Under the Statement

As Commissioner Ohlhausen argues in her dissenting statement, the UMC Statement doesn’t remove all enforcement discretion from the Commission — after all, enforcement principles, like standards in law generally, have fuzzy boundaries.

But what Commissioner Ohlhausen seems to miss is that, by invoking antitrust principles, the rule of reason and competitive effects analysis, the Statement incorporates by reference 125 years of antitrust law and economics. The Statement itself need not go into excessive detail when, with only a few words, it brings modern antitrust jurisprudence embodied in cases like Trinko, Leegin, and Brooke Group into UMC law.

Under the new rule of reason approach for UMC, the FTC will condemn conduct only when it causes or is likely to cause “harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.” In other words, the evidence must demonstrate net harm to consumers before the FTC can take action. That’s a significant constraint.

As noted above, Commissioner Wright originally proposed a safe harbor from FTC UMC enforcement whenever cognizable efficiencies are present. The Statement’s balancing test is thus a compromise. But it’s not really a big move from Commissioner Wright’s initial position.

Commissioner Wright’s original proposal tied the safe harbor to “cognizable” efficiencies, which is an exacting standard. As Commissioner Wright noted in his Blog Symposium post on the subject:

[T]he efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines. As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service. Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted. Under this strict standard, the FTC would almost certainly have no trouble demonstrating no cognizable efficiencies exist in Dan’s “blowing up of the competitor’s factory” example because the very act of sabotage amounts to an anticompetitive reduction in output.

The difference between the safe harbor approach and the balancing approach embodied in the Statement is largely a function of administrative economy. Before, the proposal would have caused the FTC to err on the side of false negatives, possibly forbearing from bringing some number of welfare-enhancing cases in exchange for a more certain reduction in false positives. Now, there is greater chance of false positives.

But the real effect is that more cases will be litigated because, in the end, both versions would require some degree of antitrust-like competitive effects analysis. Under the Statement, if procompetitive efficiencies outweigh anticompetitive harms, the defendant still wins (and the FTC is to avoid enforcement). Under the original proposal fewer actions might be brought, but those that are brought would surely settle. So one likely outcome of choosing a balancing test over the safe harbor is that more close cases will go to court to be sorted out. Whether this is a net improvement over the safe harbor depends on whether the social costs of increased litigation and error are offset by a reduction in false negatives — as well as the more robust development of the public good of legal case law.  

Reduced FTC Discretion Under the Statement

The other important benefit of the Statement is that it commits the FTC to a regime that reduces its discretion.

Chairwoman Ramirez and former Chairman Leibowitz — among others — have embraced a broader role for Section 5, particularly in order to avoid the judicial limits on antitrust actions arising out of recent Supreme Court cases like Trinko, Leegin, Brooke Group, Linkline, Weyerhaeuser and Credit Suisse.

For instance, as former Chairman Leibowitz said in 2008:

[T]he Commission should not be tied to the more technical definitions of consumer harm that limit applications of the Sherman Act when we are looking at pure Section 5 violations.

And this was no idle threat. Recent FTC cases, including Intel, N-Data, Google (Motorola), and Bosch, could all have been brought under the Sherman Act, but were brought — and settled — as Section 5 cases instead. Under the new Statement, all four would likely be Sherman Act cases.

There’s little doubt that, left unfettered, Section 5 UMC actions would only have grown in scope. Former Chairman Leibowitz, in his concurring opinion in Rambus, described UMC as

a flexible and powerful Congressional mandate to protect competition from unreasonable restraints, whether long-since recognized or newly discovered, that violate the antitrust laws, constitute incipient violations of those laws, or contravene those laws’ fundamental policies.

Both Leibowitz and former Commissioner Tom Rosch (again, among others) often repeated their views that Section 5 permitted much the same actions as were available under Section 2 — but without the annoyance of those pesky, economically sensible, judicial limitations. (Although, in fairness, Leibowitz also once commented that it would not “be wise to use the broader [Section 5] authority whenever we think we can’t win an antitrust case, as a sort of ‘fallback.’”)

In fact, there is a long and unfortunate trend of FTC commissioners and other officials asserting some sort of “public enforcement exception” to the judicial limits on Sherman Act cases. As then Deputy Director for Antitrust in the Bureau of Economics, Howard Shelanski, told Congress in 2010:

The Commission believes that its authority to prevent “unfair methods of competition” through Section 5 of the Federal Trade Commission Act enables the agency to pursue conduct that it cannot reach under the Sherman Act, and thus avoid the potential strictures of Trinko.

In this instance, and from the context (followed as it is by a request for Congress to actually exempt the agency from Trinko and Credit Suisse!), it seems that “reach” means “win.”

Still others have gone even further. Tom Rosch, for example, has suggested that the FTC should challenge Patent Assertion Entities under Section 5 merely because “we have a gut feeling” that the conduct violates the Act and it may not be actionable under Section 2.

Even more egregious, Steve Salop and Jon Baker advocate using Section 5 to implement their preferred social policies — in this case to reduce income inequality. Such expansionist views, as Joe Sims recently reminded TOTM readers, hearken back to the troubled FTC of the 1970s:  

Remember [former FTC Chairman] Mike Pertschuck saying that Section 5 could possibly be used to enforce compliance with desirable energy policies or environmental requirements, or to attack actions that, in the opinion of the FTC majority, impeded desirable employment programs or were inconsistent with the nation’s “democratic, political and social ideals.” The two speeches he delivered on this subject in 1977 were the beginning of the end for increased Section 5 enforcement in that era, since virtually everyone who heard or read them said:  “Whoa! Is this really what we want the FTC to be doing?”

Apparently, for some, it is — even today. But don’t forget: This was the era in which Congress actually briefly shuttered the FTC for refusing to recognize limits on its discretion, as Howard Beales reminds us:

The breadth, overreaching, and lack of focus in the FTC’s ambitious rulemaking agenda outraged many in business, Congress, and the media. Even the Washington Post editorialized that the FTC had become the “National Nanny.” Most significantly, these concerns reverberated in Congress. At one point, Congress refused to provide the necessary funding, and simply shut down the FTC for several days…. So great were the concerns that Congress did not reauthorize the FTC for fourteen years. Thus chastened, the Commission abandoned most of its rulemaking initiatives, and began to re-examine unfairness to develop a focused, injury-based test to evaluate practices that were allegedly unfair.

A truly significant effect of the Policy Statement will be to neutralize the effort to use UMC to make an end-run around antitrust jurisprudence in order to pursue non-economic goals. It will now be a necessary condition of a UMC enforcement action to prove a contravention of fundamental antitrust policies (i.e., consumer welfare), rather than whatever three commissioners happen to agree is a desirable goal. And the Statement puts the brakes on efforts to pursue antitrust cases under Section 5 by expressing a clear policy preference at the FTC to bring such cases under the antitrust laws.

Commissioner Ohlhausen’s objects that

the fact that this policy statement requires some harm to competition does little to constrain the Commission, as every Section 5 theory pursued in the last 45 years, no matter how controversial or convoluted, can be and has been couched in terms of protecting competition and/or consumers.

That may be true, but the same could be said of every Section 2 case, as well. Commissioner Ohlhausen seems to be dismissing the fact that the Statement effectively incorporates by reference the last 45 years of antitrust law, too. Nothing will incentivize enforcement targets to challenge the FTC in court — or incentivize the FTC itself to forbear from enforcement — like the ability to argue Trinko, Leegin and their ilk. Antitrust law isn’t perfect, of course, but making UMC law coextensive with modern antitrust law is about as much as we could ever reasonably hope for. And the Statement basically just gave UMC defendants blanket license to add a string of “See Areeda & Hovenkamp” cites to every case the FTC brings. We should count that as a huge win.

Commissioner Ohlhausen also laments the brevity and purported vagueness of the Statement, claiming that

No interpretation of the policy statement by a single Commissioner, no matter how thoughtful, will bind this or any future Commission to greater limits on Section 5 UMC enforcement than what is in this exceedingly brief, highly general statement.

But, in the end, it isn’t necessarily the Commissioners’ self-restraint upon which the Statement relies; it’s the courts’ (and defendants’) ability to take the obvious implications of the Statement seriously and read current antitrust precedent into future UMC cases. If every future UMC case is adjudicated like a Sherman or Clayton Act case, the Statement will have been a resounding success.

Arguably no FTC commissioner has been as successful in influencing FTC policy as a minority commissioner — over sustained opposition, and in a way that constrains the agency so significantly — as has Commissioner Wright today.

Filed under: antitrust, Efficiencies, error costs, exclusionary conduct, exclusive dealing, federal trade commission, ftc, law and economics, monopolization, resale price maintenance, section 5, settlements, UMC symposium Tagged: antitrust law, Commissioner Wright, Edith Ramirez, Federal Trade Commission, ftc, guidelines, joshua wright, Maureen Ohlhausen, section 5, UMC, unfair methods of competition

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Antitrust & Consumer Protection

Commissioner Wright Rightly Calls the Question on Section 5 Guidance

Popular Media Anybody who has spent much time with children knows how squishy a concept “unfairness” can be.  One can hear the exchange, “He’s not being fair!” . . .

Anybody who has spent much time with children knows how squishy a concept “unfairness” can be.  One can hear the exchange, “He’s not being fair!” “No, she’s not!,” only so many times before coming to understand that unfairness is largely in the eye of the beholder.

Perhaps it’s unfortunate, then, that Congress chose a century ago to cast the Federal Trade Commission’s authority in terms of preventing “unfair methods of competition.”  But that’s what it did, and the question now is whether there is some way to mitigate this “eye of the beholder” problem.

There is.

We know that any business practice that violates the substantive antitrust laws (the Sherman and Clayton Acts) is an unfair method of competition, so we can look to Sherman and Clayton Act precedents to assess the “unfairness” of business practices that those laws reach.  But what about the Commission’s so-called “standalone” UMC authority—its power to prevent business practices that seem to impact competition unfairly but are not technically violations of the substantive antitrust laws?

Almost two years ago, Commissioner Josh Wright recognized that if the FTC’s standalone UMC authority is to play a meaningful role in assuring market competition, the Commission should issue guidelines on what constitutes an unfair method of competition. He was right.  The Commission, you see, really has only four options with respect to standalone Section 5 claims:

  1. It could bring standalone actions based on current commissioners’ considered judgments about what constitutes unfairness. Such an approach, though, is really inconsistent with the rule of law. Past commissioners, for example, have gone so far as to suggest that practices causing “resource depletion, energy waste, environmental contamination, worker alienation, [and] the psychological and social consequences of producer-stimulated demands” could be unfair methods of competition. Maybe our current commissioners wouldn’t cast so wide a net, but they’re not always going to be in power. A government of laws and not of men simply can’t mete out state power on the basis of whim.
  2. It could bring standalone actions based on unfairness principles appearing in Section 5’s “common law.” The problem here is that there is no such common law. As Commissioner Wright has observed and I have previously explained, a common law doesn’t just happen. Development of a common law requires vigorously litigated disputes and reasoned, published opinions that resolve those disputes and serve as precedent. Section 5 “litigation,” such as it is, doesn’t involve any of that.
    • First, standalone Section 5 disputes tend not to be vigorously litigated. Because the FTC acts as both prosecutor and judge in such actions, their outcome is nearly a foregone conclusion. When FTC staff win before the administrative law judge, the ALJ’s decision is always affirmed by the full commission; when staff loses with the ALJ, the full Commission always reverses. Couple this stacked deck with the fact that unfairness exists in the eye of the beholder and will therefore change with the composition of the Commission, and we end up with a situation in which accused parties routinely settle. As Commissioner Wright observes, “parties will typically prefer to settle a Section 5 claim rather than go through lengthy and costly litigation in which they are both shooting at a moving target and have the chips stacked against them.”
    • The consent decrees that memorialize settlements, then, offer little prospective guidance. They usually don’t include any detailed explanation of why the practice at issue was an unfair method of competition. Even if they did, it wouldn’t matter much; the Commission doesn’t treat its own enforcement decisions as precedent. In light of the realities of Section 5 litigation, there really is no Section 5 common law.
  3. It could refrain from bringing standalone Section 5 actions and pursue only business practices that violate the substantive antitrust laws. Substantive antitrust violations constitute unfair methods of competition, and the federal courts have established fairly workable principles for determining when business practices violate the Sherman and Clayton Acts. The FTC could therefore avoid the “eye of the beholder” problem by limiting its UMC authority to business conduct that violates the antitrust laws. Such an approach, though, would prevent the FTC from policing conduct that, while not technically an antitrust violation, is anticompetitive and injurious to consumers.
  4. It could bring standalone Section 5 actions based on articulated guidelines establishing what constitutes an unfair method of competition. This is really the only way to use Section 5 to pursue business practices that are not otherwise antitrust violations, without offending the rule of law.

Now, if the FTC is to take this fourth approach—the only one that both allows for standalone Section 5 actions and honors rule of law commitments—it obviously has to settle on a set of guidelines.  Fortunately, it has almost done so!

Since Commissioner Wright called for Section 5 guidelines almost two years ago, much ink has been spilled outlining and critiquing proposed guidelines.  Commissioner Wright got the ball rolling by issuing his own proposal along with his call for the adoption of guidelines.  Commissioner Ohlhausen soon followed suit, proposing a slightly broader set of principles.  Numerous commentators then joined the conversation (a number doing so in a TOTM symposium), and each of the other commissioners has now stated her own views.

A good deal of consensus has emerged.  Each commissioner agrees that Section 5 should be used to prosecute only conduct that is actually anticompetitive (as defined by the federal courts).  There is also apparent consensus on the view that standalone Section 5 authority should not be used to challenge conduct governed by well-forged liability principles under the Sherman and Clayton Acts.  (For example, a practice routinely evaluated under Section 2 of the Sherman Act should not be pursued using standalone Section 5 authority.)  The commissioners, and the vast majority of commentators, also agree that there should be some efficiencies screen in prosecution decisions.  The remaining disagreement centers on the scope of the efficiencies screen—i.e., how much of an efficiency benefit must a business practice confer in order to be insulated from standalone Section 5 liability?

On that narrow issue—the only legitimate point of dispute remaining among the commissioners—three views have emerged:  Commissioner Wright would refrain from prosecuting if the conduct at issue creates any cognizable efficiencies; Commissioner Ohlhausen would do so as long as the efficiencies are not disproportionately outweighed by anticompetitive harms; Chairwoman Ramirez would engage in straightforward balancing (not a “disproportionality” inquiry) and would refrain from prosecution only where efficiencies outweigh anticompetitive harms.

That leaves three potential sets of guidelines.  In each, it would be necessary that a behavior subject to any standalone Section 5 action (1) create actual or likely anticompetitive harm, and (2) not be subject to well-forged case law under the traditional antitrust laws (so that pursuing the action might cause the distinction between lawful and unlawful commercial behavior to become blurred).  Each of the three sets of guidelines would also include an efficiencies screen—either (3a) the conduct lacks cognizable efficiencies, (3b) the harms created by the conduct are disproportionate to the conduct’s cognizable efficiencies, or (3c) the harms created by the conduct are not outweighed by cognizable efficiencies.

As Commissioner Wright has observed any one of these sets of guidelines would be superior to the status quo.  Accordingly, if the commissioners could agree on the acceptability of any of them, they could improve the state of U.S. competition law.

Recognizing as much, Commissioner Wright is wisely calling on the commissioners to vote on the acceptability of each set of guidelines.  If any set is deemed acceptable by a majority of commissioners, it should be promulgated as official FTC Guidance.  (Presumably, if more than one set commands majority support, the set that most restrains FTC enforcement authority would be the one promulgated as FTC Guidance.)

Of course, individual commissioners might just choose not to vote.  That would represent a sad abdication of authority.  Given that there isn’t (and under current practice, there can’t be) a common law of Section 5, failure to vote on a set of guidelines would effectively cast a vote for either option 1 stated above (ignore rule of law values) or option 3 (limit Section 5’s potential to enhance consumer welfare).  Let’s hope our commissioners don’t relegate us to those options.

The debate has occurred.  It’s time to vote.

Filed under: antitrust, consumer protection, federal trade commission, regulation, section 5, UMC symposium

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Antitrust & Consumer Protection

Why a Common Law Approach to Defining “Unfair Methods of Competition” Won’t Work

Popular Media Section 5 of the Federal Trade Commission Act proclaims that “[u]nfair methods of competition . . . are hereby declared unlawful.” The FTC has exclusive . . .

Section 5 of the Federal Trade Commission Act proclaims that “[u]nfair methods of competition . . . are hereby declared unlawful.” The FTC has exclusive authority to enforce that provision and uses it to prosecute Sherman Act violations. The Commission also uses the provision to prosecute conduct that doesn’t violate the Sherman Act but is, in the Commission’s view, an “unfair method of competition.”

That’s somewhat troubling, for “unfairness” is largely in the eye of the beholder. One FTC Commissioner recently defined an unfair method of competition as an action that is “‘collusive, coercive, predatory, restrictive, or deceitful,’ or otherwise oppressive, [where the actor lacks] a justification grounded in its legitimate, independent self-interest.” Some years ago, a commissioner observed that a “standalone” Section 5 action (i.e., one not premised on conduct that would violate the Sherman Act) could be used to police “social and environmental harms produced as unwelcome by-products of the marketplace: resource depletion, energy waste, environmental contamination, worker alienation, the psychological and social consequences of producer-stimulated demands.” While it’s unlikely that any FTC Commissioner would go that far today, the fact remains that those subject to Section 5 really don’t know what it forbids.  And that situation flies in the face of the Rule of Law, which at a minimum requires that those in danger of state punishment know in advance what they’re not allowed to do.

In light of this fundamental Rule of Law problem (not to mention the detrimental chilling effect vague competition rules create), many within the antitrust community have called for the FTC to provide guidance on the scope of its “unfair methods of competition” authority. Most notably, two members of the five-member FTC—Commissioners Maureen Ohlhausen and Josh Wright—have publicly called for the Commission to promulgate guidelines. So have former FTC Chairman Bill Kovacic, a number of leading practitioners, and a great many antitrust scholars.

Unfortunately, FTC Chairwoman Edith Ramirez has opposed the promulgation of Section 5 guidelines. She says she instead “favor[s] the common law approach, which has been a mainstay of American antitrust policy since the turn of the twentieth century.” Chairwoman Ramirez observes that the common law method has managed to distill workable liability rules from broad prohibitions in the primary antitrust statutes. Section 1 of the Sherman Act, for example, provides that “[e]very contract, combination … or conspiracy, in restraint of trade … is declared to be illegal.” Section 2 prohibits actions to “monopolize, or attempt to monopolize … any part of … trade.” Clayton Act Section 7 forbids any merger whose effect “may be substantially to lessen competition, or tend to create a monopoly.” Just as the common law transformed these vague provisions into fairly clear liability rules, the Chairwoman says, it can be used to provide adequate guidance on Section 5.

The problem is, there is no Section 5 common law. As Commissioner Wright and his attorney-advisor Jan Rybnicek explain in a new paper, development of a common law—which concededly may be preferable to a prescriptive statutory approach, given its flexibility, ability to evolve with new learning, and sensitivity to time- and place-specific factors—requires certain conditions that do not exist in the Section 5 context.

The common law develops and evolves in a salutary direction because (1) large numbers of litigants do their best to persuade adjudicators of the superiority of their position; (2) the closest cases—those requiring the adjudicator to make fine distinctions—get appealed and reported; (3) the adjudicators publish opinions that set forth all relevant facts, the arguments of the parties, and why one side prevailed over the other; (4) commentators criticize published opinions that are unsound or rely on welfare-reducing rules; (5) adjudicators typically follow past precedents, tweaking (or occasionally overruling) them when they have been undermined; and (6) future parties rely on past decisions when planning their affairs.

Section 5 “adjudication,” such as it is, doesn’t look anything like this. Because the Commission has exclusive authority to bring standalone Section 5 actions, it alone picks the disputes that could form the basis of any common law. It then acts as both prosecutor and judge in the administrative action that follows. Not surprisingly, defendants, who cannot know the contours of a prohibition that will change with the composition of the Commission and who face an inherently biased tribunal, usually settle quickly. After all, they are, in Commissioner Wright’s words, both “shooting at a moving target and have the chips stacked against them.” As a result, we end up with very few disputes, and even those are not vigorously litigated.

Moreover, because nearly all standalone Section 5 actions result in settlements, we almost never end up with a reasoned opinion from an adjudicator explaining why she did or did not find liability on the facts at hand and why she rejected the losing side’s arguments. These sorts of opinions are absolutely crucial for the development of the common law. Chairwoman Ramirez says litigants can glean principles from other administrative documents like complaints and consent agreements, but those documents can’t substitute for a reasoned opinion that parses arguments and says which work, which don’t, and why. On top of all this, the FTC doesn’t even treat its own enforcement decisions as precedent! How on earth could the Commission’s body of enforcement decisions guide decision-making when each could well be a one-off?

I’m a huge fan of the common law. It generally accommodates the Hayekian “knowledge problem” far better than inflexible, top-down statutes. But it requires both inputs—lots of vigorously litigated disputes—and outputs—reasoned opinions that are recognized as presumptively binding. In the Section 5 context, we’re short on both. It’s time for guidelines.

Filed under: antitrust, federal trade commission, regulation, section 5

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Antitrust & Consumer Protection

Joe Sims on First Principles of Section 5 Authority

Popular Media The FTC Act, in addition to being an early manifestation of the “can we help” school of antitrust, was a reaction to the perceptions of some that the Sherman Act, two decades old at the time, had not been enforced aggressively enough.

Joe Sims is a Partner at Jones Day

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

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

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

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

It is very difficult for me to see how that is possible, and even harder to see how it is likely.  We know what the downside is.  Remember Mike Pertschuck saying that Section 5 could possibly be used to enforce compliance with desirable energy policies or environmental requirements, or to attack actions that, in the opinion of the FTC majority, impeded desirable employment programs or were inconsistent with the nation’s “democratic, political and social ideals.”  The two speeches he delivered on this subject in 1977 were the beginning of the end for increased Section 5 enforcement in that era, since virtually everyone who heard or read them said:  “Whoa!  Is this really what we want the FTC to be doing?”

Oh, but you say:  this is unfair, since that was then and this is now.  No FTC Chair or Commissioner would take this position today.  Well, I refer you to Jon Leibowitz’s concurring opinion in Rambus, where he says that Section 5 is “a flexible and powerful Congressional mandate to protect competition from unreasonable restraints, whether long-since recognized or newly discovered, that violate the antitrust laws, constitute incipient violations of those laws, or contravene those laws’ fundamental policies.”  Of course, unlike Mike Pertschuck, he does recognize that there must be some constraints, so his version of Section 5 would “only” reach actions that are “collusive, coercive, predatory, restrictive or deceitful, or otherwise oppressive, and without a justification grounded in legitimate, independent self-interest.”  Does that make you feel better?

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

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

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

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

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Antitrust & Consumer Protection

No, dude, we don’t need more Solyndras

Popular Media Every once in a while in Washington, you see a power grab so blatant and unabashed that it shocks the consciences of even Beltway veterans . . .

Every once in a while in Washington, you see a power grab so blatant and unabashed that it shocks the consciences of even Beltway veterans who make their livelihood in the government game. This brings me to a recent opinion column featured in Politico in which venture capitalist Joe Horowitz, a Solyndra investor, argued that the U.S. government actually needs to invest in more … Solyndras.

Read the full piece here.

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Innovation & the New Economy

The Spectrum Argument Lives, Debunking Letter-Gate, and Why the DOJ Is Still Wrong to Try to Stop the AT&T/T-Mobile Merger

Popular Media Milton Mueller responded to my post Wednesday on the DOJ’s decision to halt the AT&T/T-Mobile merger by asserting that there was no evidence the merger would lead to “anything . . .

Milton Mueller responded to my post Wednesday on the DOJ’s decision to halt the AT&T/T-Mobile merger by asserting that there was no evidence the merger would lead to “anything innovative and progressive” and claiming “[t]he spectrum argument fell apart months ago, as factual inquiries revealed that AT&T had more spectrum than Verizon and the mistakenly posted lawyer’s letter revealed that it would be much less expensive to expand its capacity than to acquire T-Mobile.”  With respect to Milton, I think he’s been suckered by the “big is bad” crowd at Public Knowledge and Free Press.  But he’s hardly alone and these claims — claims that may well have under-girded the DOJ’s decision to step in to some extent — merit thorough refutation.

Read the full piece here

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Antitrust & Consumer Protection

Banning Executives

Popular Media The Department of Health and Human Services this month notified Howard Solomon of Forest Laboratories Inc. that it intends to exclude him from doing business with the federal government.

From the WSJ:

The Department of Health and Human Services this month notified Howard Solomon of Forest Laboratories Inc. that it intends to exclude him from doing business with the federal government. This, in turn, could prevent Forest from selling its drugs to Medicare, Medicaid and the Veterans Administration. If the government implements its ban, Forest would have to dump Mr. Solomon, now 83 years old, in order to protect its corporate revenue. No drug company, large or small, can afford to lose out on sales to the federal government, a major customer.

….

The Health and Human Services department startled drug makers last year when the agency said it would start invoking a little-used administrative policy under the Social Security Act against pharmaceutical executives. This policy allows officials to bar corporate leaders from health-industry companies doing business with the government, if a drug company is guilty of criminal misconduct. The agency said a chief executive or other leader can be banned even if he or she had no knowledge of a company’s criminal actions. Retaining a banned executive can trigger a company’s exclusion from government business.

Debarment is obviously a very serious remedy.  The increased use of debarment in this context has been controversial, especially in cases in which the executive has not demonstrated that the debarred individual is actually complicit.  The WSJ story discusses the Forest Laboratories example along these lines in more detail:

According to Mr. Westling, “It would be a mistake to see this as solely a health-care industry issue. The use of sanctions such as exclusion and debarment to punish individuals where the government is unable to prove a direct legal or regulatory violation could have wide-ranging impact.” An exclusion penalty could be more costly than a Justice Department prosecution.

He said that the Defense Department and the Environmental Protection Agency, for example, have debarment powers similar to the HHS exclusion authority.

The Forest case has its origins in an investigation into the company’s marketing of its big-selling antidepressants Celexa and Lexapro. Last September, Forest made a plea agreement with the government, under which it is paying $313 million in criminal and civil penalties over sales-related misconduct.

A federal court made the deal final in March. Forest Labs representatives said they were shocked when the intent-to-ban notice was received a few weeks later, because Mr. Solomon wasn’t accused by the government of misconduct.

Forest is sticking by its chief. “No one has ever alleged that Mr. Solomon did anything wrong, and excluding him [from the industry] is unjustified,” said general counsel Herschel Weinstein. “It would also set an extremely troubling precedent that would create uncertainty throughout the industry and discourage regulatory settlements.”

The issue of debarment also arises in the antitrust context as a weapon in the toolkit of antitrust enforcement agencies prosecuting cartels.  Judge Ginsburg and I have argued, in Antitrust Sanctions, that the debarment remedy in that context, along with a shift toward individual responsibility and away from ever-increasing corporate fines, would result in a shift toward efficient deterrence.   In our case, we discuss debarment for the executive actually engaged in the price-fixing as well as officers and directors who negligently supervise the price-fixers (e.g., with failure to institute an antitrust compliance program).   Without safeguards to ensure that debarment is imposed in cases of actual wrongdoing or negligent supervision, and also in the cases of settlement, that there is a factual basis for debarment, imposition of these penalties runs the risk that enforcement agencies will have arbitrary power to banish executives that are disfavored for whatever reason.  If its application is properly constrained, however, debarment can be a more effective tool in prosecuting antitrust offenses and potentially other white-collar crime than ever-increasing corporate fines which are largely borne by shareholders.  I’ll refer interested readers to the Ginsburg & Wright link above for the more detailed case in favor of adding debarment to the cartel-enforcement toolkit, including a discussion of its application in the antitrust context in a variety of other countries as well as non-antitrust settings in the U.S.

Filed under: antitrust, corporate crime, corporate law, economics

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Antitrust & Consumer Protection

Does the Voluntary Industry “Agreement” to Ban Phosphates in Dishwasher Detergents Violate Section 1?

Popular Media Apparently, the detergent industry has entered into what has been described as a “voluntary agreement” to reduce the use of phosphates in detergents (HT: Ted . . .

Apparently, the detergent industry has entered into what has been described as a “voluntary agreement” to reduce the use of phosphates in detergents (HT: Ted Frank).  A press release from Clean Water Action describes the agreement as follows:

On July 1, 2010 a voluntary ban on phosphates in dishwasher detergents will be implemented by many members of the American Cleaning Council (formerly the Soap and Detergent Association), a manufacturer’s trade group representing most detergent companies.”Industry’s announcement on phosphates in dishwasher detergents is welcome news, indeed, if somewhat overdue,” said Jonathan Scott, a spokesman for Clean Water Action, founded in the early 1970’s to fight for clean, safe water. “Even small amounts of phosphates can wreak havoc when they get into our water,” Scott says, “so it’s the last thing you want as an ingredient in detergents, which are specifically designed to end up in the water by way of household appliances and drain pipes.”

It is also apparent that some our none too pleased with the effects of reducing phosphate levels in detergents — with the primary downside being that the new product doesn’t work too well.  An article in the Weekly Standard describes the impact of the reduction:

The result is detergents that don’t work very well. There have been a handful of stories in the media about consumer complaints. The New York Times noted that on the review section of the website for Cascade—Procter & Gamble’s market-leading brand—ratings plummeted after the switch, with only 11 percent of consumers saying they would recommend the product. One woman in Florida told National Public Radio that she called Procter & Gamble to complain about how its detergent no longer worked. The customer rep told her to consider handwashing the dishes instead.

Some NPR commenters agreed. “Like so many -others, I had disassembled my dishwasher, run multiple empty ‘cleaning cycles’ using all kinds of various chemical treatments, all trying to get my dishwasher ‘fixed,’ ” said one. “We assumed that something was wrong with the machine, that it was limed up, and we tried vinegar and other remedies with limited success,” wrote another. “We do wash some dishes by hand now, using more hot water than before, and also have simply lowered our standards for what constitutes ‘clean.’ ” Another commenter complained: “I live in AZ and had the same thing happen last year when it was introduced out here. I thought it was a reaction between the ‘Green’ soap and the hard water. I wrote to the company and they sent me about $30 in coupons—for other items and for their non-green soap. I dumped the 3 unopened bottles plus the one I was using.”

The detergents were so problematic that they caused environmental delinquency even among NPR listeners. One disappointed commenter rationalized his backsliding:

We first heard about the new phosphate-free detergent formulations almost a year ago. Wanting to do the Right Thing we rushed out and bought some and immediately began using it. The results, although not as bad as reported by some, were still pretty underwhelming. Our dishes and glassware were covered by a gritty film and so was the inside of the dishwasher. We are in Southern California and have very hard water. Adding vinegar to the rinse cycle helped *some* but still we found excessive buildup on our dishes. Disgusted with the new detergent, we decided to go back to something with phosphate. We were not able to find phosphate detergent at the supermarket, but some local discount stores sell supplies that are apparently remaindered by the manufacturers. We bought six boxes of old Cascade with phosphate—about a year’s supply. We figured someone would buy it—might as well be us.

When Consumer Reports did laboratory testing on the new nil-phosphate detergents, they concluded that none of them “equaled the excellent (but now discontinued) product that topped our Ratings in August 2009.”

There is, of course, an interesting antitrust angle here.  Thom has posted previously on another voluntary industry agreement in the soda industry to refrain from selling high calorie soda (and limiting the size of even healthy drinks) in schools.  In the comments to that post I suggest that one important issue is whether the soda players actually reached an agreement:

The passing or collective endorsement of a set of “best practices” to which members of the industry can voluntary choose to adhere to or not is not necessarily an actionable antitrust conspiracy. Of course, calling something “voluntary guidelines” won’t immunize an actual agreement if it is there. But it seems that the parties were pretty careful — EXCEPT for in their commercials and in print!!! — to make sure to emphasize that the antitrust-relevant choices were made unilaterally. But I can’t imagine antitrust counsel would have given the thumbs up to the commercials…

So it is here.  I’ve no doubt that such an agreement, if it exists, is reachable under Section of the Sherman Act.  The question is whether the detergent industry has taken some steps to protect themselves from an “agreement” finding under Section 1.  I don’t have enough detail to know whether that is the case — but if anybody does, please send it along.

Filed under: antitrust, cartels, economics, environment

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Antitrust & Consumer Protection

Blaming BP

Popular Media As a sea of oil slops over sand, oysters and pelicans in the Gulf, it seems natural to blame the entity that made this happen– BP . . . .

As a sea of oil slops over sand, oysters and pelicans in the Gulf, it seems natural to blame the entity that made this happen– BP . The Gulf disaster could have easily been avoided–from the well design, to the defective seals, to the haphazard response, topped off with the lack of any backup plan. It doesn’t help that BP is a big, rich, oil company. The company will likely be sued and castigated in courts and markets.

Read the full piece here.
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Innovation & the New Economy