Pushing the Limits? A Primer on FTC Competition Rulemaking - International Center for Law & Economics
Focus Areas:    Antitrust | Competition | FTC

Pushing the Limits? A Primer on FTC Competition Rulemaking

Truth on the Market View Original

[On Monday, June 27, Concurrences hosted a conference on the Rulemaking Authority of the Federal Trade Commission. This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]

[The post below was authored by former Federal Trade Commission Acting Chair Maureen K. Ohlhausen and former Assistant U.S. Attorney General James F. Rill.]

Since its founding in 1914, the Federal Trade Commission (FTC) has held a unique and multifaceted role in the U.S. administrative state and the economy. It possesses powerful investigative and information-gathering powers, including through compulsory processes; a multi-layered administrative-adjudication process to prosecute “unfair methods of competition (UMC)” (and later, “unfair and deceptive acts and practices (UDAP),” as well); and an important role in educating and informing the business community and the public. What the FTC cannot be, however, is a legislature with broad authority to expand, contract, or alter the laws that Congress has tasked it with enforcing.

Recent proposals for aggressive UMC rulemaking, predicated on Section 6(g) of the FTC Act, would have the effect of claiming just this sort of quasi-legislative power for the commission based on a thin statutory reed authorizing “rules and regulations for the purpose of carrying out the provisions of” that act. This usurpation of power would distract the agency from its core mission of case-by-case expert application of the FTC Act through administrative adjudication. It would also be inconsistent with the explicit grants of rulemaking authority that Congress has given the FTC and run afoul of the congressional and constitutional “guard rails” that cabin the commission’s authority.

FTC’s Unique Role as an Administrative Adjudicator

The FTC’s Part III adjudication authority is central to its mission of preserving fair competition in the U.S. economy. The FTC has enjoyed considerable success in recent years with its administrative adjudications, both in terms of winning on appeal and in shaping the development of antitrust law overall (not simply a separate category of UMC law) by creating citable precedent in key areas. However, as a result of its July 1, 2021, open meeting and President Joe Biden’s “Promoting Competition in the American Economy” executive order, the FTC appears to be headed for another misadventure in response to calls to claim authority for broad, legislative-style “unfair methods of competition” rulemaking out of Section 6(g) of the FTC Act. The commission recently took a significant and misguided step toward this goal by rescinding—without replacing—its bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act, divorcing (at least in the commission majority’s view) Section 5 from prevailing antitrust-law principles and leaving the business community without any current guidance as to what the commission considers “unfair.”

FTC’s Rulemaking Authority Was Meant to Complement its Case-by-Case Adjudicatory Authority, Not Supplant It

As described below, broad rulemaking of this sort would likely encounter stiff resistance in the courts, due to its tenuous statutory basis and the myriad constitutional and institutional problems it creates. But even aside from the issue of legality, such a move would distract the FTC from its fundamental function as an expert case-by-case adjudicator of competition issues. It would be far too tempting for the commission to simply regulate its way to the desired outcome, bypassing all neutral arbiters along the way. And by seeking to promulgate such rules through abbreviated notice-and-comment rulemaking, the FTC would be claiming extremely broad substantive authority to directly regulate business conduct across the economy with relatively few of the procedural protections that Congress felt necessary for the FTC’s trade-regulation rules in the consumer-protection context. This approach risks not only a diversion of scarce agency resources from meaningful adjudication opportunities, but also potentially a loss of public legitimacy for the commission should it try to exempt itself from these important rulemaking safeguards.

FTC Lacks Authority to Promulgate Legislative-Style Competition Rules

The FTC has historically been hesitant to exercise UMC rulemaking authority under Section 6(g) of the FTC Act, which simply states that FTC shall have power “[f]rom time to time to classify corporations and … to make rules and regulations for the purpose of carrying out the provisions” of the FTC Act. Current proponents of UMC rulemaking argue for a broad interpretation of this clause, allowing for legally binding rulemaking on any issue subject to the FTC’s jurisdiction. But the FTC’s past reticence to exercise such sweeping powers is likely due to the existence of significant and unresolved questions of the FTC’s UMC rulemaking authority from both a statutory and constitutional perspective.

Absence of Statutory Authority

The FTC’s authority to conduct rulemaking under Section 6(g) has been tested in court only once, in National Petroleum Refiners Association v. FTCIn that case, the FTC succeeded in classifying the failure to post octane ratings on gasoline pumps as “an unfair method of competition.” The U.S. Court of Appeals for the D.C. Circuit found that Section 6(g) did confer this rulemaking authority. But Congress responded two years later with the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act of 1975, which created a new rulemaking scheme that applied exclusively to the FTC’s consumer-protection rules. This act expressly excluded rulemaking on unfair methods of competition from its authority. The statute’s provision that UMC rulemaking is unaffected by the legislation manifests strong congressional design that such rules would be governed not by Magnuson-Moss, but by the FTC Act itself. The reference in Magnuson-Moss to the statute not affecting “any authority” of the FTC to engage in UMC rulemaking—as opposed to “the authority”— reflects Congress’ agnostic view on whether the FTC possessed any such authority. It simply means that whatever authority exists for UMC rulemaking, the Magnuson-Moss provisions do not affect it, and Congress left the question open for the courts to resolve.

Proponents of UMC rulemaking argue that Magnuson-Moss left the FTC’s competition-rulemaking authority intact and entitled to Chevron deference. But, as has been pointed out by many commentators over the decades, that would be highly incongruous, given that National Petroleum Refiners dealt with both UMC and UDAP authority under Section 6(g), yet Congress’ reaction was to provide specific UDAP rulemaking authority and expressly take no position on UMC rulemaking. As further evidenced by the fact that the FTC has never attempted to promulgate a UMC rule in the years following enactment of Magnuson-Moss, the act is best read as declining to endorse the FTC’s UMC rulemaking authority. Instead, it leaves the question open for future consideration by the courts.

Turning to the terms of the FTC Act, modern statutory interpretation takes a far different approach than the court in National Petroleum Refiners, which discounted the significance of Section 5’s enumeration of adjudication as the means for restraining UMC and UDAP, reasoning that Section 5(b) did not use limiting language and that Section 6(g) provides a source of substantive rulemaking authority. This approach is in clear tension with the elephants-in-mouseholes doctrine developed by the Supreme Court in recent years. The FTC’s recent claim of broad substantive UMC rulemaking authority based on the absence of limiting language and a vague, ancillary provision authorizing rulemaking alongside the ability to “classify corporations” stands in conflict with the Court’s admonition in Whitman v. American Trucking Association. The Court in AMG Capital Management, LLC v. FTC recently applied similar principles in the context of the FTC’s authority under the FTC Act. Here,the Court emphasized “the historical importance of administrative proceedings” and declined to give the FTC a shortcut to desirable outcomes in federal court. Similarly, granting broad UMC-rulemaking authority to the FTC would permit it to circumvent the FTC Act’s defining feature of case-by-case adjudications. Applying the principles enunciated in Whitman and AMG, Section 5 is best read as specifying the sole means of UMC enforcement (adjudication), and Section 6(g) is best understood as permitting the FTC to specify how it will carry out its adjudicative, investigative, and informative functions. Thus, Section 6(g) grants ministerial, not legislative, rulemaking authority.

Notably, this reading of the FTC Act would accord with how the FTC viewed its authority until 1962, a fact that the D.C. Circuit found insignificant, but that later doctrine would weigh heavily. Courts should consider an agency’s “past approach” toward its interpretation of a statute, and an agency’s longstanding view that it lacks the authority to take a certain action is a “rather telling” clue that the agency’s newfound claim to such authority is incorrect. Conversely, even widespread judicial acceptance of an interpretation of an agency’s authority does not necessarily mean the construction of the statute is correct. In AMG, the Court gave little weight to the FTC’s argument that appellate courts “have, until recently, consistently accepted its interpretation.” It also rejected the FTC’s argument that “Congress has in effect twice ratified that interpretation in subsequent amendments to the Act.” Because the amendments did not address the scope of Section 13(b), they did not convince the Court in AMG that Congress had acquiesced in the lower courts’ interpretation.

The court in National Petroleum Refiners also lauded the benefits of rulemaking authority and emphasized that the ability to promulgate rules would allow the FTC to carry out the purpose of the act. But the Supreme Court has emphasized that “however sensible (or not)” an interpretation may be, “a reviewing court’s task is to apply the text of the statute, not to improve upon it.” Whatever benefits UMC-rulemaking authority may confer on the FTC, they cannot justify departure from the text of the FTC Act.

In sum, even Chevron requires the agency to rely on a “permissible construction” of the statute, and it is doubtful that the current Supreme Court would see a broad assertion of substantive antitrust rulemaking as “permissible” under the vague language of Section 6(g).

Constitutional Vulnerabilities

The shaky foundation supporting the FTC’s claimed authority for UMC rulemaking is belied by both the potential breadth of such rules and the lack of clear guidance in Section 6(g) itself. The presence of either of these factors increases the likelihood that any rule promulgated under Section 6 runs afoul of the constitutional nondelegation doctrine.

The nondelegation doctrine requires Congress to provide “an intelligible principle” to assist the agency to which it has delegated legislative discretion. Although long considered moribund, the doctrine was recently addressed by the U.S. Supreme Court in Gundy v. United States, which underscored the current relevance of limitations on Congress’ ability to transfer unfettered legislative-like powers to federal agencies. Although the statute in that case was ruled permissible by a plurality of justices, most of the Court’s current members have expressed concerns that the Court has long been too quick to reject nondelegation arguments, arguing for stricter controls in this area. In a concurrence, Justice Samuel Alito lamented that the Court has “uniformly rejected nondelegation arguments and has upheld provisions that authorized agencies to adopt important rules pursuant to extraordinarily capacious standards,” while Justices Neil Gorsuch and Clarence Thomas and Chief Justice John Roberts dissented, decrying the “unbounded policy choices” Congress had bestowed, stating that it “is delegation running riot” to “hand off to the nation’s chief prosecutor the power to write his own criminal code.”

The Gundy dissent cited to A.L.A. Schechter Poultry Corp. v. United States, where the Supreme Court struck down Congress’ delegation of authority based on language very similar to Section 5 of the FTC Act. Schechter Poultry examined whether the authority that Congress granted to the president under the National Industrial Recovery Act (NIRA) violated the nondelegation clause. The offending NIRA provision gave the president authority to approve “codes of fair competition,” which comes uncomfortably close to the FTC Act’s “unfair methods of competition” grant of authority. Notably, Schechter Poultry expressly differentiated NIRA from the FTC Act based on distinctions that do not apply in the rulemaking context. Specifically, the Court stated that, despite the similar delegation of authority, unlike NIRA, actions under the FTC Act are subject to an adjudicative process. The Court observed that the commission serves as “a quasi judicial body” and assesses what constitutes unfair methods of competition “in particular instances, upon evidence, in light of particular competitive conditions.” That essential distinction disappears in the case of rulemaking, where the commission acts in a quasi-legislative role and promulgates rules of broad application.

It appears that the nondelegation doctrine may be poised for a revival and may play a significant role in the Supreme Court’s evaluation of expansive attempts by the Biden administration to exercise legislative-type authority without explicit congressional authorization and guidance. This would create a challenging backdrop for the FTC to attempt aggressive new UMC rulemaking.

Antitrust Rulemaking by FTC Is Likely to Lead to Inefficient Outcomes and Institutional Conflicts

Aside from the doubts raised by these significant statutory and constitutional issues as to the legality of competition rulemaking by the FTC, there are also several policy and institutional factors counseling against legislative-style antitrust rulemaking.

Legislative Rulemaking on Competition Issues Runs Contrary to the Purpose of Antitrust Law

The core of U.S. antitrust law is based on broadly drafted statutes that, at least for violations outside the criminal-conspiracy context, leave determinations of likely anticompetitive effects, procompetitive justifications, and ultimate liability up to factfinders charged with highly detailed, case-specific determinations. Although no factfinder is infallible, this requirement for highly fact-bound analysis helps to ensure that each case’s outcome has a high likelihood of preserving or increasing consumer welfare.

Legislative rulemaking would replace this quintessential fact-based process with one-size-fits-all bright-line rules. Competition rules would function like per se prohibitions, but based on notice-and-comment procedures, rather than the broad and longstanding legal and economic consensus usually required for per se condemnation under the Sherman Act. Past experience with similar regulatory regimes should give reason for pause here: the Interstate Commerce Commission, for example, failed to efficiently regulate the railroad industry before being abolished with bipartisan consensus in 1996, costing consumers, by some estimates, as much as several billion (in today’s) dollars annually in lost competitive benefits. As FTC Commissioner Christine Wilson observes, regulatory rules “frequently stifle innovation, raise prices, and lower output and quality without producing concomitant health, safety, and other benefits for consumers.” By sacrificing the precision of case-by-case adjudication, rulemaking advocates are also losing one of the best tools we have to account for “market dynamics, new sources of competition, and consumer preferences.”

Potential for Institutional Conflict with DOJ

In addition to these substantive concerns, UMC rulemaking by the FTC would also create institutional conflicts between the FTC and DOJ and lead to divergence between the legal standards applicable to the FTC Act, on the one hand, and the Sherman and Clayton acts, on the other. At present, courts have interpreted the FTC Act to be generally coextensive with the prohibitions on unlawful mergers and anticompetitive conduct under the Sherman and Clayton acts, with the limited exception of invitations to collude. But because the FTC alone has the authority to enforce the FTC Act, and rulemaking by the FTC would be limited to interpretations of that act (and could not directly affect or repeal caselaw interpreting the Sherman and Clayton acts), it would create two separate standards of liability. Given that the FTC and DOJ historically have divided enforcement between the agencies based on the industry at issue, this could result in different rules of conduct, depending on the industry involved. Types of conduct that have the potential for anticompetitive effects under certain circumstances but generally pass a rule-of-reason analysis could nonetheless be banned outright if the industry is subject to FTC oversight. Dissonance between the two federal enforcement agencies would be even more difficult for companies not falling firmly within either agency’s purview; those entities would lack certainty as to which guidelines to follow: rule-of-reason precedent or FTC rules.

Conclusion

Following its rebuke at the Supreme Court in the AMG Capital Management case, now is the time for the FTC to focus on its core, case-by-case administrative mission, taking full advantage of its unique adjudicative expertise. Broad unfair methods of competition rulemaking, however, would be an aggressive step in the wrong direction—away from FTC’s core mission and toward a no-man’s-land far afield from the FTC’s governing statutes.