Yesterday was seemingly a good day for users of smartphones, tablets and other mobile devices. The Federal Communications Commission approved, with conditions, Verizon’s purchase of wireless spectrum from SpectrumCo, a consortium of cable companies. The more spectrum that’s put to use, the more we’ll ease the coming “spectrum crunch” as exploding data demands outstrip supply. This particular spectrum has sat unused for years, and the FCC’s approval of the deal (following on the Department of Justice’s approval last week) clears the way for some welcome relief.

Read the full piece here.

Yesterday was seemingly a good day for users of smartphones, tablets and other mobile devices. The Federal Communications Commission approved, with conditions, Verizon’s purchase of wireless spectrum from SpectrumCo, a consortium of cable companies. The more spectrum that’s put to use, the more we’ll ease the coming “spectrum crunch” as exploding data demands outstrip supply. This particular spectrum has sat unused for years, and the FCC’s approval of the deal (following on the Department of Justice’s approval last week) clears the way for some welcome relief.

The FCC’s decision seems measured, citing both benefits and risks of the deal to consumers and rejecting most of the claims of the deal’s staunchest critics. But this apparent reasonableness masks the true, arbitrary nature of FCC review: a costly, unsupervised game of “Mother, May I?”, requiring applicants to rearrange their businesses in ways the agency could neither require by regulation nor extract as concessions without exceeding the proper scope of its transaction review. Most troublingly, the FCC need not even make its extra-legal demands explicit. Because all future applicants know that the actual approval of this deal is far less significant to them than the process behind it, even yesterday’s good news comes with an asterisk.

It’s no secret that some at the agency — to say nothing of the self-proclaimed consumer advocates who aggrandize it –seek to manage the tech sector based largely on their unsubstantiated belief that “Big is Bad.” Yesterday’s order and the conditions imposed on the parties are animated by this assertion. But it’s by no means clear that consumers are well served by this approach; rather, this maligned concentration of spectrum has been accompanied by lower prices — along with enormous investment, expanded access and rapid innovation.

[From Gerald R. Faulhaber, et al., Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 11, 2011), available at http://ssrn.com/abstract=1880964.]

Of course, sometimes big really is bad. The central challenge for policymakers is ensuring they don’t erroneously thwart beneficial deals and instead heed Nobel laureate Ronald Coase’s caution: “if [a regulator] finds something — a business practice of one sort or other — that he does not understand, he looks for a monopoly explanation.” That’s why, in theory, we limit agencies’ authority to review deals. But in practice, the FCC exceeds limits on its authority, applies a vague “public interest” standard with little analytical rigor, and avoids even that minimal rigor by pressuring companies into making “voluntary” concessions.

In this case, the FCC’s review of the commercial agreements accompanying the spectrum deal exceeded the limits of Section 310(d) of the Communications Act. As Commissioner Pai noted in his concurring statement, “Congress limited the scope of our review to the proposed transfer of spectrum licenses, not to other business agreements that may involve the same parties.” We (and others) raised this concern in public comments filed with the Commission. Here’s the agency’s own legal analysis — in full: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” There’s not even an accompanying footnote.

Accepting the limits Congress has imposed on the FCC doesn’t require approving the Verizon/SpectrumCo deal — or any other. The DOJ is perfectly willing to use antitrust to block such deals, such as rejecting the AT&T/T-Mobile merger last year. Just last week, DOJ demanded concessions of the parties to this deal (although its analysis, too, was flawed). The key difference is that DOJ can block or condition approval of a deal only if it shows the deal would substantially harm consumer welfare. And DOJ bears the burden of showing this harm, measured against extensive case law and economic analysis. But parties before the FCC bear the burden of demonstrating that their transactions enhance competition and serve the “public interest.” That phrase “lacks any definite meaning,” as Ronald Coase noted more than 50 years ago. Little has changed.

The FCC falls prey all too easily to the problem Coase identified: overestimating the dangers of concentration and underestimating how much spectrum sales and other transactions can benefit consumers. Even the Obama DOJ has cautioned the FCC against “striving for broadband markets that look like textbook markets of perfect competition….” As industry evolves and competitors vie for scarce resources (especially in wireless broadband), they meet new competitive challenges with novel business arrangements and increased investment. Economies of scale may become more important, and concentration may increase, benefiting, rather than harming, consumers. But the FCC cries “Monopoly!” — without actually having to prove it.

Perhaps worse, having firms over a barrel, the FCC uses its leverage to regulate future conduct by extracting “voluntary” conditions in the name of the public interest –often conditions it couldn’t impose by regulation. That’s almost certainly what happened here with Verizon’s concession on data roaming. Verizon (but not its competitors) will be subject, for five years, to obligations the D.C. Circuit may soon rule the FCC has no authority to impose — much as Comcast “voluntarily” agreed to net neutrality conditions in its merger with NBC Universal even stricter than the regulations the D.C. Circuit seems likely to strike down for everyone else. This creates a patchwork of rules and obligations, coerced without sound economic justification, in a fashion largely unreviewable by courts, and in contravention of limits placed on the FCC’s authority by Congress and the courts.

This effectively grants the FCC unchecked power to stop transactions it doesn’t even have the authority to review, and to regulate companies in extra-legal ways it has no authority to.

Congress should rein in the FCC. The FCC Process Reform Act passed by the House in March (but now stalled in the Senate) is a good start, requiring that conditions be narrowly tailored to real harms the FCC actually has authority to regulate. But until Congress makes clear that the public interest standard is not a carte blanche and that the limits it explicitly imposed on the scope of the Commission’s reviewing authority are binding — or, even better, that the DOJ alone has the authority to analyze a transaction’s competitive effects — the FCC will continue playing games with our high-tech economy, even when it appears to be exercising restraint.

Cross-posted from CNET

My former student and recent George Mason Law graduate (and co-author, here) Angela Diveley has posted Clarifying State Action Immunity Under the Antitrust Laws: FTC v. Phoebe Putney Health System, Inc.  It is a look at the state action doctrine and the Supreme Court’s next chance to grapple with it in Phoebe Putney.  here is the abstract:

The tension between federalism and national competition policy has come to a head. The state action doctrine finds its basis in principles of federalism, permitting states to replace free competition with alternative regulatory regimes they believe better serve the public interest. Public restraints have a unique ability to undermine the regime of free competition that provides the basis of U.S.- and state-commerce policies. Nevertheless, preservation of federalism remains an important rationale for protecting such restraints. The doctrine has elusive contours, however, which have given rise to circuit splits and overbroad application that threatens to subvert the state action doctrine’s dual goals of federalism and competition. The recent Eleventh Circuit decision in FTC v. Phoebe Putney Health System, Inc. epitomizes the concerns associated with misapplication of state action immunity. The U.S. Supreme Court recently granted the FTC’s petition for certiorari and now has the opportunity to more clearly define the contours of the doctrine. In Phoebe Putney, the FTC has challenged a merger it claims is the product of a sham transaction, an allegation certain to test the boundaries of the state action doctrine and implicate the interpretation of a two-pronged test designed to determine whether consumer welfare-reducing conduct taken pursuant to purported state authorization is immune from antitrust challenge. The FTC’s petition for writ of certiorari raises two issues for review. First, it presents the question concerning the appropriate interpretation of foreseeability of anticompetitive conduct. Second, the FTC presents the question whether a passive supervisory role on the state’s part can be construed as state action or whether its approval of the merger was a sham. In this paper, I seek to explicate the areas in which the state action doctrine needs clarification and to predict how the Court will decide the case in light of precedent and the principles underlying the doctrine.

Go read the whole thing.

Filed under: antitrust, economics, federalism, george mason university school of law, legal scholarship

You pronounce the petitioners name in Leegin Creative Leather Products, Inc. v. PSKS, Inc.: lee-j?n.

That and other SCOTUS pronunciation debates resolved here (courtesy of the Green Bag and the Yale Law Library).

Filed under: antitrust, resale price maintenance

Wall Street Journal

• OPINION
• July 31, 2012

‘A Climate That Helps Us Grow’

By PAUL H. RUBIN

President Obama’s riff on small business—”If you’ve got a business, you didn’t build that, somebody else made that happen”—has become a major controversy. The Romney campaign has made this quote the subject of several speeches and ads, and there have been rallies all over the country of business people with signs saying that “I did build this business.”

Mr. Obama is now claiming that his words, delivered at a campaign stop in Roanoke, Va., on July 13, were taken out of context. “Of course Americans build their own businesses,” he said in a campaign ad last week. What he meant was simply that government sets the stage for business creation. In his speech, and again in his campaign ad, the example Mr. Obama pointed to was “roads and bridges.”

The context of the speech indicates the president really did mean that “you didn’t build that.” But let’s give him the benefit of the doubt; let’s assume he merely meant that business is impossible without government institutions that create the infrastructure for the economy to operate. As Mr. Obama’s deputy campaign chief Stephanie Cutter said, in clarifying his original remarks on July 24, “We build our businesses through hard work and initiative, with the public and private sectors working together to create a climate that helps us grow. President Obama knows that.”

But business is certainly not getting “a climate that helps us grow” from the current administration. That administration has instead created a hostile climate through its regulatory policies.

The news media report almost daily about new regulatory burdens. More generally, according to an analysis in March by the Heritage Foundation, “Red Tape Rising,” the Obama administration in its first three years adopted 106 major regulations (those with costs over $100 million), compared with 28 such regulations in the George W. Bush administration. Heritage notes that there are 144 more such major regulations in the pipeline.

Consider a major example of government investment—roads and bridges. A transportation system needs roads, but it also needs gasoline. This administration’s policies—its refusal to allow a private company to build the Keystone XL pipeline, its reduction in permits for offshore drilling and increased EPA regulation of pollutants—retard the production of gasoline. If transportation is an important input from government to creating a favorable climate for business, shouldn’t we be encouraging, not discouraging, gasoline production?

Other inputs needed by business are capital and labor. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed by Mr. Obama and enforced by his appointees, makes raising capital and investing more difficult. Since many regulations needed to implement this law have not even been written, business cannot know how to adapt to them. This increases uncertainty and so reduces incentives for investment.

The increased minimum wage, passed and signed in the early days of the administration, discourages hiring of entry-level workers. ObamaCare has increased uncertainty regarding future labor costs and so hindered business in hiring and expanding. The pro-union decisions by Obama appointees at the National Labor Relations Board do not create a climate to help the economy grow.

There are many other burdens placed on business. Example: The Americans With Disabilities Act is being interpreted by the Justice Department to require all hotel-based swimming pools to provide increased access to disabled persons. This will come at a high cost per pool. Many hotels and motels are small, family-run enterprises. This requirement will either lead to an increase in prices or to a decision not to have pools at all.

Either policy will induce patrons to shift to larger chain motels. Interestingly, the application of this rule has been delayed for existing pools until Jan. 31, 2013, after the election. Families vacationing this summer will not notice the new requirement.

If we accept the plain meaning of Mr. Obama’s speech, it indicates that he does not believe in the importance of entrepreneurs in creating businesses. But if we accept the reinterpretation of his speech in light of his administration’s deeds, it indicates a belief that a hostile regulatory climate poses no danger to economic growth. Either interpretation means that this administration is not good for business.

Mr. Rubin is professor of economics at Emory University and president-elect of the Southern Economic Association.

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Filed under: consumer protection, doj, health care, health care reform debate, regulation Tagged: regulation

Our greatly lamented colleague Lary Ribstein was a movie buff. Some time ago he wrote an encyclopedic article on business in the movies, “Wall Street and Vine: Hollywood’s View of
Business.”  At the time of his death, he and I were in discussions about publishing this article in the journal I edit, Managerial and Decison Economics.  After his tragic death, I contacted his widow, Ann, and received permission to publish the article.  It is now published in the June issue of MDE.  (If your library does not subscribe to MDE, the article is still available on SSRN.)  Anyone with any interest in the movies and their perception of business must read this article. Given the volume of Larry’s scholarship, it is amazing that he had time to see as many movies as he discusses in this article.

Filed under: art, business, film, larry ribstein rip

From the WSJ:

White House regulatory chief Cass Sunstein is leaving his post this month to return to Harvard Law School, officials said Friday.

Mr. Sunstein has long been an advocate of behavorial economics in setting policy, the notion that people will respond to incentives, and has argued for restraint in government regulations. As such, he was met with skepticism and opposition by some liberals when he was chosen at the start of the Obama administration.

As administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget, his formal title, Mr. Sunstein led an effort to look back at existing regulations with an eye toward killing those that are no longer needed or cost effective. The White House estimates that effort has already produced $10 billion in savings over five years, with more to come.

“Cass has shown that it is possible to support economic growth without sacrificing health, safety and the environment,” President Barack Obama said in a statement. He said these reforms and “his tenacious promotion of cost-benefit analysis,” will “benefit Americans for years to come.”

Even so, conservatives point to sweeping new regulations for the financial sector and health care in arguing that the administration has increased the regulatory burden on businesses.

Mr. Sunstein will depart this month for Harvard, where he will rejoin the law school faculty as the Felix Frankfurter Professor of Law and Director of the Program on Behavioral Economics and Public Policy.

It will be interesting to hear, once Professor Sunstein returns to an academic setting, his views on whether and in what instances — aside from the CFPB — behavioral economics actually had much impact on the formation of regulatory policy within the Administration.

Filed under: behavioral economics, regulation

Richard Epstein replies to Judge Posner’s Apple v. Motorola opinion and follow-up article in The Atlantic.

The anti-patent sentiment has just been fueled by a remarkable opinion by Judge Richard Posner, my long-time colleague at the University of Chicago, sitting as a trial judge in the major case, Apple v. Motorola. The high-profile case concerns five patents—four by Apple and one by Motorola—that are involved in mobile phone technology, and it has drawn more than its fair share of attention. Judge Posner took the extraordinary step of dismissing the claims of both sides with prejudice—meaning, the case cannot be filed again elsewhere—on the grounds that neither side could make good on its argument for either damages or injunctions.

Thus, when the dust settled, there was no reason at all to have a trial on whether either side had infringed the patents of the other. In a subsequent piece written for The Atlantic, grandly entitled “Why There are Too Many Patents in America,” Posner delivered a general critique of the patent system, discussing the broader issues involved in his judicial decision.

There is much of interest, as always, in Epstein’s column.  But the closing section on damages and injunctions is where the action is:

What is so striking about Posner’s relentless dissection of the imprecision in these claims was that he could apply it with equal conviction in any patent software dispute. The estimates of damages under the law are not confined to a single standard, but often involve an uncertain choice between reasonable royalties for licensing the patent and actual damages that were incurred because the patents were not licensed. The injunctive relief is (or at least should be) awarded precisely because it is so difficult to figure out what those damages really ought to be.

But Posner said that he would not allow an injunction if the best that the plaintiffs could garner was $1 in nominal damages. That surely seems over the top, because if there is infringement, the one number that is manifestly wrong is $1. A more sensible approach here, therefore, is to mix and marry the two remedies, so that the injunction does not pull the past product off the market, but awards some damages for past losses, while giving the infringer some period of time—say three to six months—to invent around the patent for future output. This then sets the stage for a negotiated license if that is cheaper.

By putting the remedial cart before the liability horse, we have the odd situation that no one can find out anything about the strength of the patent or the potential range of damages. If that is done on a common basis, then we will have knocked out the entire patent system for software, without having the slightest idea of the relative strength of the Apple and Motorola contentions.

The Posner decision looks doubly worrisome against the backdrop of his ominous Atlantic column, which shows his ill-concealed disdain for a complex industry with which he has had no direct engagement. It is an odd way to make patent policy. Right now, a similar Apple-Samsung dispute is before Judge Lucy Koh, which will involve a real trial. The Posner opinion is already on the fast track to appeal before the Federal Circuit, which will give us more information as to whether these submarine assaults on the patent system will take hold. Let us hope that Posner’s mysterious patent adventurism dies a quick and deserved death.

Do go read the whole thing.  For interested readers, here is Posner’s Atlantic column.

Filed under: business, economics, entrepreneurship, intellectual property, licensing, litigation, markets, patent, technology

On July 31 the FTC voted to withdraw its 2003 Policy Statement on Monetary Remedies in Competition Cases.  Commissioner Ohlhausen issued her first dissent since joining the Commission, and points out the folly and the danger in the Commission’s withdrawal of its Policy Statement.

Read the full piece here.