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Interest of Amicus Curiae

Amici curiae are economists and antitrust scholars who write to share their perspective with the Court.[1] The names of the signatories appear in the attached Addendum.

We have an interest in ensuring the proper application of antitrust doctrine and that it reflects current economic principles.[2]

We think that the District Court followed the law and sound economic principles in reviewing the FTC’s challenge to the vertical merger between a platform provider (Microsoft) and a content creator (Activision).

Summary of the Argument

The FTC proceeded against the proposed Microsoft-Activision merger with a prospective theory based on the FTC’s predicted economic incentives of Microsoft to foreclose Activision’s first-person shooter video game, Call of Duty—a 20-year, multi-platform franchise—from all rivals in three proposed markets: high performance consoles, cloud streaming, and library subscription services. After the parties submitted extensive factual and expert evidence, the District Court concluded that the FTC had not shown a likelihood that it would prevail on its claim that this vertical merger may substantially lessen competition.

The District Court followed the proper framework for reviewing the merger given the FTC’s vertical theory of harm. First, a court must consider whether the combination has the ability and the incentive to foreclose the input from rivals. If the court determines both ability and incentive exist, the court must decide what effect, if any, such a foreclosure will have on competition.

Accepting the FTC’s narrow high-performance-console market for Rule 13(b) purposes, the District Court concluded that Microsoft lacked an economic incentive to foreclose Call of Duty from Sony, the dominant player in the FTC’s market. In so doing, the District Court rejected the FTC’s theory that Microsoft’s commitment to Sony to continue offering Call of Duty on PlayStation was a “proposed remedy” unworthy of consideration under Rule 13(b).

The District Court also concluded that the merger would expand access to Call of Duty to the benefit of gamers. With respect to the nascent cloud-streaming market, the District Court found that, pre-merger, Activision had not made Call of Duty available to any cloud-streaming providers and was unlikely to do so based on a long-held view that doing it was not in its interest. Microsoft’s plan to add Call of Duty to its streaming service represented an output-expanding product of the merger. Moreover, Microsoft had reached agreements with five (5) cloud-streaming providers to allow them to stream the game as well, which the District Court concluded would result in the merger creating more (not less) Call of Duty availability. And the District Court’s consideration of these agreements—including with sophisticated providers like Nvidia—countered the FTC’s central theory that Microsoft would limit the availability of Call of Duty to its own platform.

Regarding the proposed library subscription market, the District Court found that, pre-merger, Call of Duty was not currently available to gamers via subscriptions, and that Activision had no plans to offer it to gaming platforms. Moreover, based on current market conditions and Activision’s actions before the merger, the District Court found that, even accepting for preliminary injunction purposes that Microsoft would offer Call of Duty exclusively on its own subscription service, the merger would not represent input foreclosure because the alternative was no access to the game by subscription at all. The District Court rejected the FTC’s economic theory that more availability of an input, even if only via Xbox’s library subscription service, could result in less competition.

Finally, the critical element in the analysis of the effects of the merger is the impact that potential foreclosure would have on competition. The District Court did not reach this ultimate step, having found no incentive to withhold Call of Duty. But the fact that the FTC’s expert economist concluded that, at worst, the transaction would result in a 5.5% share shift from the dominant platform (Sony PlayStation) to the much smaller platform (Xbox), suggests that the transaction is unlikely to harm competition. And it belies the FTC’s other argument that the transaction would increase a trend toward concentration, which in any event is not a proxy for showing harm to competition.

[1] Under Rule 29(a)(4)(E) of the Federal Rules of Appellate Procedure, amici certify that (i) no party’s counsel authored the brief in-whole or in-part; (ii) no party or a party’s counsel contributed money that was intended to fund preparing or submitting the brief; and (iii) no person, other than amici or its counsel, contributed money that was intended to fund preparing or submitting the brief.

[2] All parties have consented to the filing of this brief.

The Evolution of FTC Antitrust Enforcement – Highlights of Its Origins and Major Trends

1910-1914 – Creation and Launch

The election of 1912, which led to the creation of the Federal Trade Commission (FTC), occurred at the apex of the Progressive Era. Since antebellum times, Grover Cleveland had been the only Democrat elected as president. But a Democratic landslide in the 1910 midterms during the Taft administration substantially reduced the Republicans’ Senate majority and gave the Democrats a huge majority in the House, signaling a major political shift. Spurred by progressive concern that Standard Oil—decided in 1911—signaled judicial leniency toward trusts and monopolies, government control of big business became the leading issue of the 1912 campaign. Both the progressive Democrats and the so-called Republican “insurgents” favored stronger antitrust laws, reduced hours and an antitrust exemption for workers, and closer federal regulation of banking and currency, among other items. Progressive agendas led both Woodrow Wilson’s “New Freedom” platform and the “New Nationalism” of former Republican President Theodore Roosevelt and his Bull Moose Party.

Read the full piece here.

Before becoming chair of the Federal Trade Commission (FTC), Lina Khan advocated the use of rulemakings to implement the prohibition on unfair methods of competition (UMC) in Section 5 of the FTC Act. As chair, she proposed a rule, which likely will be finalized in the spring, to ban noncompete clauses in employment contracts. But I expect a court to quash this bold assertion of quasi-legislative power.

Read the full piece here.

On June 27, 2023, the Federal Trade Commission (“FTC”) announced proposed changes to Hart-Scott-Rodino Act (“HSR Act”) premerger notification form. Less than a month later, on July 19, the FTC and Department of Justice (“DOJ”) announced proposed changes to the agencies’ joint merger guidelines. These proceedings are closely related, both part of the Biden administration’s ongoing efforts to approach U.S. merger law more aggressively. But despite being part of the same substantive agenda, these two sets of changes are governed by distinct procedural rules and, ultimately, are likely to have very different effects on how merger law is enforced in the United States.

Read the full piece here.

Labor Day approaches with most of us looking forward to a long weekend off, but there’s much in competition world looming on the horizon. As I am looking forward to a couple of days off, I’ll offer more of an annotated bibliography than analysis. But also a bit of discussion, because I am what I am.

Earlier this week, the Federal Trade Commission (FTC) and U.S. Justice Department’s (DOJ) Antitrust Division announced a series of workshops “aimed at promoting a dynamic discussion about the draft [merger] guidelines to complement the comments currently being submitted to the agencies by the public.” The first of these workshops is slated for Sept. 5, the day after Labor Day. Workshops two and three have yet to be announced. The timing is tight, given that the deadline for submitting public comments on the guidelines is Sept. 18. There might indeed be a dynamic discussion, even if the agenda for the first workshop doesn’t promise a balanced one.

Read the full piece here.

Abstract

The Federal Trade Commission recently proposed a rule banning nearly all employee noncompete agreement (“NCAs”) as unfair methods of competition under Section 5 of the Federal Trade Commission Act. The proposed rule reflects two complementary pillars of an aggressive new enforcement agenda championed by Commission Chair Lina Khan, a leading voice in the NeoBrandeisian antitrust movement. First, such a rule depends on the assumption, rejected by most prior Commissions, that the Act empowers the Commission to issue legislative rules. Proceeding by rulemaking is essential, the Commission has said, to fight a “hyperconcentrated economy” that injures employees and consumers alike. Second, the content of the rule reflects the Commission’s repudiation of consumer welfare and the Sherman Act’s Rule of Reason as guides to implementing Section 5.

Affected parties will no doubt challenge the Commission’s assertion of authority to issue legislative rules. This article assumes for the sake of argument that the Commission possesses the authority to issue such rules enforcing Section 5. Still, prudence can counsel that an agency refrain from issuing rules before it has fully educated itself about the nature of the economic phenomena it hopes to regulate. Such prudence seems particularly appropriate when the Commission has very recently adopted an entirely new substantive standard governing such conduct. Deferring a rulemaking does not mean inaction. The Commission could develop competition policy regarding NCAs the old-fashioned way, investigating and challenging such agreements on a case-by-case basis.

The Commission rejected these prudential concerns and proceeded to ban nearly all NCAs, assuring the public that it had educated itself sufficiently about the origin and impact of NCAs to conduct a global assessment of such agreements. The Notice of Proposed Rulemaking (“NPRM”) offered three rationales for the proposed rule, drawn from a late 2022 Statement of Section 5 Enforcement Policy. First, the Commission opined that NCAs are “restrictive” because they prevent employees from selling their labor to other employers or starting their own business in competition with their employer. Second, NCAs result from procedural coercion, because employers use a “particularly acute bargaining advantage” to impose such agreements. Third, NCAs are substantively coercive, because they burden the employee’s right to quit and pursue a more lucrative opportunity.

The first rationale applied to all NCAs. The second and third applied to all NCAs except those binding senior executives. Such executives, the Commission said, bargain for such agreements with the assistance of counsel and presumably receive higher salary and/or more generous severance in return for entering such NCAs. Because NCAs also have a “negative impact on competitive conditions,” the NPRM also concluded that they are presumptively unfair methods of competition.

The Commission conceded that NCAs can create cognizable benefits. Nonetheless, the Commission concluded that such benefits do not justify NCAs, for two reasons. First, less restrictive means can “reasonably achieve” such benefits. Second, such benefits do not exceed the harms that NCAs produce.

The Commission also rejected the alternative remedy of mandatory precontractual disclosure of NCAs for two interrelated reasons. First, such disclosure would not prevent employers from using overwhelming bargaining power to impose such restraints. Second, disclosure would not alter the number or scope of NCAs and thus would not reduce their aggregate negative economic impact.

The procedural coercion rationale played an outsized role in the Commission’s Section 5 analysis, informing the findings that NCAs are also “restrictive” and substantively coercive. Moreover, the outsized emphasis on procedural coercion dovetailed nicely with the NeoBrandeisian claim that ordinary Americans are routinely helpless before large concentrations of private economic power. Indeed, when the Commission released the NPRM, Chair Khan separately tweeted that NCAs reduced core economic liberties.

Still, the Commission offered no definition of “coercion” or explanation of how to determine whether employers have used coercion to impose NCAs on employees. Instead, the Commission articulated several subsidiary determinations regarding the characteristics of employers and employees that, taken together, established that employers always possess and use an acutely overwhelming bargaining advantage to impose nonexecutive NCAs. Thus, the Commission emphasized that labor market power is widespread, due in part to labor market concentration, most employees are unaware of NCAs before they enter such agreements, NCAs generally appear in standard form contracts, employees rarely bargain over such agreements, most employees live paycheck-to-paycheck and thus have no choice but to accept NCAs, and individuals negotiating over terms of employment discount or ignore the possibility that they will depart from the job they are about to accept and thus downplay the potential impact of an NCA on their future employment autonomy.

This article contends that the Commission’s procedural coercion rationale for condemning nonexecutive NCAs does not withstand analysis. In particular, the Commission’s various subsidiary determinations that support the procedural coercion rationale have no basis in the evidence before the Commission, contradict such evidence and/or disregard modern economic theory regarding contract formation. For instance, a recent study by two Department of Labor economists finds that the average Herfindahl-Hirschman Index in American labor markets is 333, the equivalent of 30 equally-sized firms, each with a 3.33 percent market share, competing for labor in the same market. A previous version of the study was published on the Department of Labor’s website several months before the Commission issued the proposed rule. The NPRM offers no contrary evidence regarding the proportion of labor markets that are concentrated. “Hyperconcentration of labor markets” is apparently a myth.

Moreover, the NPRM ignores record evidence that 61 percent of employees know of NCAs before they accept the offer of employment. The NPRM’s failure to address these data is particularly strange, insofar as the NPRM cites the very same page of the academic article where these data appear three different times for other propositions. The Commission also erred when it assumed that employers with labor market power will use such power coercively to impose even beneficial NCAs. This assumption would have made perfect sense in 1965. However, since the 1980s, scholars practicing Transaction Cost Economics have explained how firms with market power, including labor market power, will not use that power to impose beneficial nonstandard agreements, including NCAs. The Commission was apparently unaware of this literature.

Nor does the lack of individualized bargaining and reliance on form contracts suggest that employers use power coercively to impose NCAs. Form contracts often arise in competitive markets and reduce transaction costs. Background rules governing contract formation, robust state court review of NCAs and exit by potential employees can constrain employers’ ability to obtain unreasonable provisions and induce employers to pay premium wages to compensate employees for agreeing to NCAs. These considerations may explain why a majority of employees who had advanced knowledge of NCAs considered the agreements reasonable, a finding the NPRM ignores.

Nor does it matter that most employees work paycheck-to-paycheck. The Commission ignored the possibility that such individuals may be employed when seeking a new job, bargain from a position of relative security and can thus “walk away” from onerous NCAs. The Commission also ignored economic literature establishing that the presence of some such individuals in a labor market can ensure that employers offer reasonable terms to all potential employees, including unemployed job seekers.

Refutation of the procedural coercion rationale for banning nonexecutive NCAs requires reconsideration of the other two rationales as well. For instance, nonexecutive NCAs are the result of voluntary integration and thus not procedurally coercive or substantively coercive, either. Moreover, because some nonexecutive NCAs are voluntary, the Commission must abandon its erroneous assumption that the beneficial impacts of NCAs necessarily coexist with coercive harms. Proper assessment of business justifications requires the Commission to ascertain the proportion of NCAs that constitute voluntary integration, revise downward its estimate of coercive harms and reassess NCAs’ relative harms and benefits. This revision could result in a determination that NCAs’ benefits in fact exceed their harms. Finally, recognition that beneficial NCAs are the result of voluntary integration requires the Commission to reconsider the mandatory disclosure remedy, which the Commission rejected based on the erroneous belief that employers use bargaining power to impose even fully-disclosed and beneficial NCAs. Such reconsideration could of course lead to revising the scope of the proposed ban or rejection of any ban.

The Commission may well be entirely capable of assessing the global impact of NCAs on economic variables such as price, output, and wages. However, the Commission rejected such a rule of reason approach in favor of a standard that turns in part on the process of contract formation. Thus, the Commission necessarily took on the task of gathering information regarding the process of forming NCAs and of assessing that data in light of applicable economic theory. The Commission’s demonstrably poor execution of this task reveals that it lacks the capacity to conduct a generalized assessment of NCAs under a governing standard that treats procedural coercion as legally significant.

Because it lacks the capacity to assess the process of forming nonexecutive NCAs, the Commission should withdraw the NPRM and start over. There are two alternative paths the Commission may take to develop well-considered competition policy governing NCAs. First, the Commission could revert to the rule of reason approach it rejected in 2021. The Commission could draw upon its considerable study of the impact of NCAs on wages, prices and employee training and promulgate a rule that bans those agreements the Commission believes produce net harm, after reconsidering regulatory alternatives such as mandatory disclosure.

Second, the Commission could continue to embrace its new Section 5 standard but take an “adjudication only” approach to implementation. The Commission could simultaneously take other steps through various forms of public engagement to educate itself about contract formation in general and the formation of NCAs in particular. The Commission could build on data it has to this point ignored regarding various attributes of employers, employees and labor markets more generally. Adjudication and self-education could be mutually reinforcing. Self-education could inform the Commission’s determination of which NCAs to challenge, while information generated in adjudication could improve the Commission’s knowledge base about NCAs. Ultimately this two-track approach could generate sufficient information to justify a well-considered rule governing NCAs.

Among the many public-interest comments submitted on the draft merger guidelines proposed by the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) were those of Gregory Werden, who has been a visiting scholar at the Mercatus Center at George Mason University since late 2022.

Why is Greg’s filing special? Simply put, he is the leading expert on the history and technical analysis of modern merger guidelines, having worked on the 1982, 1984, 1992, 1997, and 2010 versions as a senior DOJ antitrust economist. He has authored numerous scholarly articles assessing the competitive analysis of mergers and explaining the content of prior guidelines.

Read the full piece here.

 

The Federal Trade Commission (FTC) recently announced proposed changes to Hart-Scott-Rodino (HSR) premerger notification form. This proposal, alongside proposed changes to federal merger guidelines, is part of the Biden Administration’s more aggressive approach to U.S. merger law. Although the merger guideline revisions are receiving most of the attention, the proposed HSR premerger notification form revisions could well have the more substantial lasting impacts.

Read the full piece here.

Abstract

Consumer welfare has been a north star of the Federal Trade Commission (FTC), providing an organizing principle for diverse issues under the Commission’s dual competition and consumer protection missions and, specifically, a uniform ground on which to examine the law and economics of privacy matters and the tradeoffs that privacy policies entail. This paper provides the first contemporary literature synthesis by former FTC staff that brings together the legal and economics literatures on privacy. Our observations are the following: (a) privacy is a complex subject, not a simple attribute of goods and services or a simple state of affairs; (b) privacy policies entail complex tradeoffs for and across individuals; (c) the economic literature finds diverse effects, both intended and unintended, of privacy policies, including on competition and innovation; (d) while there is diverse and growing evidence of the costs of privacy policies, countervailing benefits have been understudied and, as of yet, empirical evidence of such benefits remains slight; and (e) observed costs associated with omnibus policies suggest caution regarding one-size-fits-all regulation.