text:
"The [9th Circuit] panel held that it was not precluded from reaching the merits of plaintiffs' Sherman Act claim because: (1) the Supreme Court did not hold in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984), that the NCAA's amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA's rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.
The panel held that even though many of the NCAA's rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason. Applying the Rule of Reason, the panel held that the NCAA's rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the "price" that recruits pay to attend college. The record supported the district court's finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA's product by promoting its current understanding of amateurism. The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules – i.e., allowing NCAA members to give scholarships up to the full cost of attendance – but the district court's other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. The panel vacated the district court's judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.
Chief Judge Thomas concurred in part and dissented in part. He disagreed with the [two judge panel] majority's conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes' full cost of attendance."
The key point of the 9th Circuit's decision, that competitively restrictive rules are not exempt from antitrust scrutiny because they promote the perception of "amateurism," is clearly correct, and in line with modern antitrust jurisprudence. The Supreme Court has taught that anticompetitive restrictions aimed at furthering the reputation of the learned professions (see Goldfarb v. Virginia State Bar (1975), striking down a minimum legal fee schedule for title searches), and their ability to advance social goals effectively (see FTC v. Superior Court Trial Lawyers Association (1990), condemning a joint effort to raise government-paid legal aid fees and thereby "enhance" the quality of legal aid representation), are fully subject to antitrust review. Even the alleged desire to ensure that quality medical services are not sacrificed (see FTC v. Indiana Federation of Dentists (1986), rejecting a dental association's agreement to deny insurers' request for procedure-specific dental x-rays), and that safety is maintained in major construction projects (see National Society of Professional Engineers v. United States (1978), striking down an ethical canon barring competitive bids for engineering services), do not shield agreements from antitrust evaluation and potential condemnation. In light of those teachings, the NCAA's claim (based on a clear misreading of the Supreme Court's NCAA v. Board of Regents (1984) decision) that its highly restrictive "amateurism" rules should be exempt from antitrust review is patently absurd.
Moreover, as a matter of substance, the NCAA is precisely the sort of institution whose rules merit close evaluation by antitrust enforcers. The NCAA is a monopsony cartel, representing the institutions (America's colleges) which effectively are the sole buyers of the services of high school football and basketball players who hope to pursue professional sports careers. Moreover, the NCAA's rules regarding student athletes greatly limit competition, artificially limit athletes' compensation, and are in severe tension with the "scholar-athlete" ideal that the NCAA claims it promotes. In 2011, the late University of Chicago Professor Gary Becker, a Nobel Laureate in Economics, put it starkly:
"[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players. NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work. The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players' parents, and of course the size of scholarships.
It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players. The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes. Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. .
A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games. . . .
[T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.
Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout. The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams. Schools usually forget about athletes when they stop competing. An important further difference between athletes and non-athletes who drop out of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes. They could have used these additional assets to help them finish school, or to get a better start if they dropped out."
Also in 2011, Judge Richard Posner of the 7th Circuit echoed Professor Becker's views regarding NCAA student competition rules and noted the NCAA's history of avoiding antitrust problems:
"The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes. Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA's monopsonistic behavior has thus far not been successfully challenged. The justification that the NCAA offers – that collegiate athletes are students and would be corrupted by being salaried – coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.
As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their "employers," the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid."
In sum, the 9th Circuit O'Bannon Court merits praise for deciding clearly and unequivocally that antitrust applies to the NCAA's student athlete rules, irrespective of whether one agrees with the specific holding in the case. The antitrust laws are a "consumer welfare prescription" that applies generally to activities that have an impact on interstate commerce, and short shrift should be given to the claim by any institution that it should be antitrust-exempt based on the alleged "virtue" or "public-spiritedness" of its actions. (This reasoning also supports the lifting of baseball's antitrust exemption, which stems from a 1922 Supreme Court decision that is out of step with modern antitrust jurisprudence. But that is a matter for another day.)
The [9th Circuit] panel held that it was not precluded from reaching the merits of plaintiffs' Sherman Act claim because: (1) the Supreme Court did not hold in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984), that the NCAA's amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA's rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.
The panel held that even though many of the NCAA's rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason. Applying the Rule of Reason, the panel held that the NCAA's rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the "price" that recruits pay to attend college. The record supported the district court's finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA's product by promoting its current understanding of amateurism. The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules – i.e., allowing NCAA members to give scholarships up to the full cost of attendance – but the district court's other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. The panel vacated the district court's judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.
Chief Judge Thomas concurred in part and dissented in part. He disagreed with the [two judge panel] majority's conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes' full cost of attendance.
The key point of the 9th Circuit's decision, that competitively restrictive rules are not exempt from antitrust scrutiny because they promote the perception of "amateurism," is clearly correct, and in line with modern antitrust jurisprudence. The Supreme Court has taught that anticompetitive restrictions aimed at furthering the reputation of the learned professions (see Goldfarb v. Virginia State Bar (1975), striking down a minimum legal fee schedule for title searches), and their ability to advance social goals effectively (see FTC v. Superior Court Trial Lawyers Association (1990), condemning a joint effort to raise government-paid legal aid fees and thereby "enhance" the quality of legal aid representation), are fully subject to antitrust review. Even the alleged desire to ensure that quality medical services are not sacrificed (see FTC v. Indiana Federation of Dentists (1986), rejecting a dental association's agreement to deny insurers' request for procedure-specific dental x-rays), and that safety is maintained in major construction projects (see National Society of Professional Engineers v. United States (1978), striking down an ethical canon barring competitive bids for engineering services), do not shield agreements from antitrust evaluation and potential condemnation. In light of those teachings, the NCAA's claim (based on a clear misreading of the Supreme Court's NCAA v. Board of Regents (1984) decision) that its highly restrictive "amateurism" rules should be exempt from antitrust review is patently absurd.
Moreover, as a matter of substance, the NCAA is precisely the sort of institution whose rules merit close evaluation by antitrust enforcers. The NCAA is a monopsony cartel, representing the institutions (America's colleges) which effectively are the sole buyers of the services of high school football and basketball players who hope to pursue professional sports careers. Moreover, the NCAA's rules regarding student athletes greatly limit competition, artificially limit athletes' compensation, and are in severe tension with the "scholar-athlete" ideal that the NCAA claims it promotes. In 2011, the late University of Chicago Professor Gary Becker, a Nobel Laureate in Economics, put it starkly:
[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players. NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work. The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players' parents, and of course the size of scholarships.
It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players. The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes. Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. . . .
A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games. . . .
[T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.
Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout. The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams. Schools usually forget about athletes when they stop competing. An important further difference between athletes and non-athletes who drop out of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes. They could have used these additional assets to help them finish school, or to get a better start if they dropped out.
Also in 2011, Judge Richard Posner of the 7th Circuit echoed Professor Becker's views regarding NCAA student competition rules and noted the NCAA's history of avoiding antitrust problems:
The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes. Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA's monopsonistic behavior has thus far not been successfully challenged. The justification that the NCAA offers – that collegiate athletes are students and would be corrupted by being salaried – coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.
As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their "employers," the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid.
In sum, the 9th Circuit O'Bannon Court merits praise for deciding clearly and unequivocally that antitrust applies to the NCAA's student athlete rules, irrespective of whether one agrees with the specific holding in the case. The antitrust laws are a "consumer welfare prescription" that applies generally to activities that have an impact on interstate commerce, and short shrift should be given to any institution that claims it should be antitrust-exempt based on the alleged "virtue" or "public-spiritedness" of its actions. (This reasoning also supports the lifting of baseball's antitrust exemption, which stems from a 1922 Supreme Court decision that is out of step with modern antitrust jurisprudence. But that is a matter for another day.)
But are the leaders at the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade paying any attention? The most recent public reports are not encouraging.
In a very recent filing with the U.S. International Trade Commission (ITC), FTC Chairwoman Edith Ramirez stated that "the danger that bargaining conducted in the shadow of an [ITC] exclusion order will lead to patent hold-up is real." (Comparable to injunctions, ITC exclusion orders preclude the importation of items that infringe U.S. patents. They are the only effective remedy the ITC can give for patent infringement, since the ITC cannot assess damages or royalties.) She thus argued that, before issuing an exclusion order, the ITC should require an SEP holder to show that the infringer is unwilling or unable to enter into a patent license on "fair, reasonable, and non-discriminatory" (FRAND) terms – a new and major burden on the vindication of patent rights. In justifying this burden, Chairwoman Ramirez pointed to Motorola's allegedly excessive SEP royalty demands from Microsoft – $6-$8 per gaming console, as opposed to a federal district court finding that pennies per console was the appropriate amount. She also cited LSI Semiconductor's demand for royalties that exceeded the selling price of Realtek's standard-compliant product, whereas a federal district court found the appropriate royalty to be only .19% of the product's selling price. But these two examples do not support Chairwoman Ramirez's point – quite the contrary. The fact that high initial royalty requests subsequently are slashed by patent courts shows that the patent litigation system is working, not that antitrust enforcement is needed, or that a special burden of proof must be placed on SEP holders. Moreover, differences in bargaining positions are to be expected as part of the normal back-and-forth of bargaining. Indeed, if anything, the extremely modest judicial royalty assessments in these cases raise the concern that SEP holders are being undercompensated, not overcompensated.
A recent speech by DOJ Assistant Attorney General for Antitrust (AAG) William J. Baer, delivered at the International Bar Association's Competition Conference, suffers from the same sort of misunderstanding as Chairman Ramirez's ITC filing. Stating that "[h]old up concerns are real", AAG Baer cited the two examples described by Chairwoman Ramirez. He also mentioned the fact that Innovatio requested a royalty rate of over $16 per smart tablet for its SEP portfolio, but was awarded a rate of less than 10 cents per unit by the court. While admitting that the implementers "proved victorious in court" in those cases, he asserted that "not every implementer has the wherewithal to litigate", that "[s]ometimes implementers accede to licensors' demands, fearing exclusion and costly litigation", that "consumers can be harmed and innovation incentives are distorted", and that therefore "[a] future of exciting new products built atop existing technology may be . . . deferred". These theoretical concerns are belied by the lack of empirical support for hold-up, and are contradicted by the recent finding, previously noted, that SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy. (In addition, the implementers of patented technology tend to be large corporations; AAG Baer's assertion that some may not have "the wherewithal to litigate" is a bare proposition unsupported by empirical evidence or more nuanced analysis.) In short, DOJ, like FTC, is advancing an argument that undermines, rather than bolsters, the case for applying antitrust to SEP holders' efforts to defend their patent rights.
Ideally the FTC and DOJ should reevaluate their recent obsession with allegedly abusive unilateral SEP behavior and refocus their attention on truly serious competitive problems. (Chairwoman Ramirez and AAG Baer are both outstanding and highly experienced lawyers who are well-versed in policy analysis; one would hope that they would be open to reconsidering current FTC and DOJ policy toward SEPs, in light of hard evidence.) Doing so would benefit consumer welfare and innovation – which are, after all, the goals that those important agencies are committed to promote.
The pattern is pretty clear: The American Hospital Association (AHA) makes the case that mergers in the provider market are good for consumers, while mergers in the health insurance market are bad. A scholar or two decries all consolidation in both markets. Another interested group, like maybe the American Medical Association (AMA), also criticizes the mergers. And it's usually left to a representative of the insurance industry, typically one or more of the merging parties themselves, or perhaps a scholar from a free market think tank, to defend the merger.
Lurking behind the public and politicized airings of these mergers, and especially the pending Anthem/Cigna and Aetna/Humana health insurance mergers, is the Affordable Care Act (ACA). Unfortunately, the partisan politics surrounding the ACA, particularly during this election season, may be trumping the sensible economic analysis of the competitive effects of these mergers.
In particular, the partisan assessments of the ACA's effect on the marketplace have greatly colored the Congressional (mis-)understandings of the competitive consequences of the mergers.
Witness testimony and questions from members of Congress at the hearings suggest that there is widespread agreement that the ACA is encouraging increased consolidation in healthcare provider markets, for example, but there is nothing approaching unanimity of opinion in Congress or among interested parties regarding what, if anything, to do about it. Congressional Democrats, for their part, have insisted that stepped up vigilance, particularly of health insurance mergers, is required to ensure that continued competition in health insurance markets isn't undermined, and that the realization of the ACA's objectives in the provider market aren't undermined by insurance companies engaging in anticompetitive conduct. Meanwhile, Congressional Republicans have generally been inclined to imply (or outright state) that increased concentration is bad, so that they can blame increasing concentration and any lack of competition on the increased regulatory costs or other effects of the ACA. Both sides appear to be missing the greater complexities of the story, however.
While the ACA may be creating certain impediments in the health insurance market, it's also creating some opportunities for increased health insurance competition, and implementing provisions that should serve to hold down prices. Furthermore, even if the ACA is encouraging more concentration, those increases in concentration can't be assumed to be anticompetitive. Mergers may very well be the best way for insurers to provide benefits to consumers in a post-ACA world — that is, the world we live in. The ACA may have plenty of negative outcomes, and there may be reasons to attack the ACA itself, but there is no reason to assume that any increased concentration it may bring about is a bad thing.
We don't need more self-serving and/or politicized testimony We need instead to apply an economic framework to the competition issues arising from these mergers in order to understand their actual, likely effects on the health insurance marketplace we have. This framework has to answer questions like:
Beginning with this post, at least a few of us here at TOTM will take on some of these issues, as part of a blog series aimed at better understanding the antitrust law and economics of the pending health insurance mergers.
Today, we will focus on the ambiguous competitive implications of the ACA. Although not a comprehensive analysis, in this post we will discuss some key insights into how the ACA's regulations and subsidies should inform our assessment of the competitiveness of the healthcare industry as a whole, and the antitrust review of health insurance mergers in particular.
It's an understatement to say that the ACA is an issue of great political controversy. While many Democrats argue that it has been nothing but a boon to consumers, Republicans usually have nothing good to say about the law's effects. But both sides miss important but ambiguous effects of the law on the healthcare industry. And because they miss (or disregard) this ambiguity for political reasons, they risk seriously misunderstanding the legal and economic implications of the ACA for healthcare industry mergers.
To begin with, there are substantial negative effects, of course. Requiring insurance companies to accept patients with pre-existing conditions reduces the ability of insurance companies to manage risk. This has led to upward pricing pressure for premiums. While the mandate to buy insurance was supposed to help bring more young, healthy people into the risk pool, so far the projected signups haven't been realized.
The ACA's redefinition of what is an acceptable insurance policy has also caused many consumers to lose the policy of their choice. And the ACA's many regulations, such as the Minimum Loss Ratio requiring insurance companies to spend 80% of premiums on healthcare, have squeezed the profit margins of many insurance companies, leading, in some cases, to exit from the marketplace altogether and, in others, to a reduction of new marketplace entry or competition in other submarkets.
On the other hand, there may be benefits from the ACA. While many insurers participated in private exchanges even before the ACA-mandated health insurance exchanges, the increased consumer education from the government's efforts may have helped enrollment even in private exchanges, and may also have helped to keep premiums from increasing as much as they would have otherwise. At the same time, the increased subsidies for individuals have helped lower-income people afford those premiums. Some have even argued that increased participation in the on-demand economy can be linked to the ability of individuals to buy health insurance directly. On top of that, there has been some entry into certain health insurance submarkets due to lower barriers to entry (because there is less need for agents to sell in a new market with the online exchanges). And the changes in how Medicare pays, with a greater focus on outcomes rather than services provided, has led to the adoption of value-based pricing from both health care providers and health insurance companies.
Further, some of the ACA's effects have decidedly ambiguous consequences for healthcare and health insurance markets. On the one hand, for example, the ACA's compensation rules have encouraged consolidation among healthcare providers, as noted. One reason for this is that the government gives higher payments for Medicare services delivered by a hospital versus an independent doctor. Similarly, increased regulatory burdens have led to higher compliance costs and more consolidation as providers attempt to economize on those costs. All of this has happened perhaps to the detriment of doctors (and/or patients) who wanted to remain independent from hospitals and larger health network systems, and, as a result, has generally raised costs for payors like insurers and governments.
But much of this consolidation has also arguably led to increased efficiency and greater benefits for consumers. For instance, the integration of healthcare networks leads to increased sharing of health information and better analytics, better care for patients, reduced overhead costs, and other efficiencies. Ultimately these should translate into higher quality care for patients. And to the extent that they do, they should also translate into lower costs for insurers and lower premiums — provided health insurers are not prevented from obtaining sufficient bargaining power to impose pricing discipline on healthcare providers.
In other words, both the AHA and AMA could be right as to different aspects of the ACA's effects.
But what they can't say is that increased consolidation per se is clearly problematic, nor that, even if it is correlated with sub-optimal outcomes, it is consolidation causing those outcomes, rather than something else (like the ACA) that is causing both the sub-optimal outcomes as well as consolidation.
In fact, it may well be the case that increased consolidation improves overall outcomes in healthcare provider and health insurance markets relative to what would happen under the ACA absent consolidation. For Congressional Democrats and others interested in bolstering the ACA and offering the best possible outcomes for consumers, reflexively challenging health insurance mergers because consolidation is "bad," may be undermining both of these objectives.
Meanwhile, and for the same reasons, Congressional Republicans who decry Obamacare should be careful that they do not likewise condemn mergers under what amounts to a "big is bad" theory that is inconsistent with the rigorous law and economics approach that they otherwise generally support. To the extent that the true target is not health insurance industry consolidation, but rather underlying regulatory changes that have encouraged that consolidation, scoring political points by impugning mergers threatens both health insurance consumers in the short run, as well as consumers throughout the economy in the long run (by undermining the well-established economic critiques of a reflexive "big is bad" response).
It is simply not clear that ACA-induced health insurance mergers are likely to be anticompetitive. In fact, because the ACA builds on state regulation of insurance providers, requiring greater transparency and regulatory review of pricing and coverage terms, it seems unlikely that health insurers would be free to engage in anticompetitive price increases or reduced coverage that could harm consumers.
On the contrary, the managerial and transactional efficiencies from the proposed mergers, combined with greater bargaining power against now-larger providers are likely to lead to both better quality care and cost savings passed-on to consumers. Increased entry, at least in part due to the ACA in most of the markets in which the merging companies will compete, along with integrated health networks themselves entering and threatening entry into insurance markets, will almost certainly lead to more consumer cost savings. In the current regulatory environment created by the ACA, in other words, insurance mergers have considerable upside potential, with little downside risk.
In sum, regardless of what one thinks about the ACA and its likely effects on consumers, it is not clear that health insurance mergers, especially in a post-ACA world, will be harmful.
Rather, assessing the likely competitive effects of health insurance mergers entails consideration of many complicated (and, unfortunately, politicized) issues. In future blog posts we will discuss (among other things): the proper treatment of efficiencies arising from health insurance mergers, the appropriate geographic and product markets for health insurance merger reviews, the role of state regulations in assessing likely competitive effects, and the strengths and weaknesses of arguments for potential competitive harms arising from the mergers.
Merger analysis is inherently speculative, but, as courts have repeatedly had occasion to find, the FCC has a penchant for stretching speculation beyond the breaking point, adopting theories of harm that are vaguely possible, even if unlikely and inconsistent with past practice, and poorly supported by empirical evidence. The FCC's approach here seems to fit this description.
To begin with, as he must, Sallet acknowledged that there was no direct competitive overlap in the areas served by Comcast and Time Warner Cable, and no consumer would have seen the number of providers available to her changed by the deal.
But the FCC staff viewed this critical fact as "not outcome determinative." Instead, Sallet explained that the staff's opposition was based primarily on a concern that the deal might enable Comcast to harm "nascent" OVD competitors in order to protect its video (MVPD) business:
Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively, especially through the use of new business models.
The justification for the concern boiled down to an assumption that the addition of TWC's subscriber base would be sufficient to render an otherwise too-costly anticompetitive campaign against OVDs worthwhile:
Without the merger, a company taking action against OVDs for the benefit of the Pay TV system as a whole would incur costs but gain additional sales – or protect existing sales — only within its footprint. But the combined entity, having a larger footprint, would internalize more of the external "benefits" provided to other industry members.
The FCC theorized that, by acquiring a larger footprint, Comcast would gain enough bargaining power and leverage, as well as the means to profit from an exclusionary strategy, leading it to employ a range of harmful tactics — such as impairing the quality/speed of OVD streams, imposing data caps, limiting OVD access to TV-connected devices, imposing higher interconnection fees, and saddling OVDs with higher programming costs. It's difficult to see how such conduct would be permitted under the FCC's Open Internet Order/Title II regime, but, nevertheless, the staff apparently believed that Comcast would possess a powerful "toolkit" with which to harm OVDs post-transaction.
First, the analysis turned on what Comcast could and would do if it were larger. But Comcast was already the largest ISP and MVPD (now second largest MVPD, post AT&T/DIRECTV) in the nation, and presumably it has approximately the same incentives and ability to disadvantage OVDs today.
In fact, there's no reason to believe that the growth of Comcast's MVPD business would cause any material change in its incentives with respect to OVDs. Whatever nefarious incentives the merger allegedly would have created by increasing Comcast's share of the MVPD market (which is where the purported benefits in the FCC staff's anticompetitive story would be realized), those incentives would be proportional to the size of increase in Comcast's national MVPD market share — which, here, would be about eight percentage points: from 22% to under 30% of the national market.
It's difficult to believe that Comcast would gain the wherewithal to engage in this costly strategy by adding such a relatively small fraction of the MVPD market (which would still leave other MVPDs serving fully 70% of the market to reap the purported benefits instead of Comcast), but wouldn't have it at its current size – and there's no evidence that it has ever employed such strategies with its current market share.
It bears highlighting that the D.C. Circuit has already twice rejected FCC efforts to impose a 30% market cap on MVPDs, based on the Commission's inability to demonstrate that a greater-than-30% share would create competitive problems, especially given the highly dynamic nature of the MVPD market. In vacating the FCC's most recent effort to do so in 2009, the D.C. Circuit was resolute in its condemnation of the agency, noting:
In sum, the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all [MVPD] subscribers would threaten to reduce either competition or diversity in programming.
The extent of competition and the amount of available programming (including original programming distributed by OVDs themselves) has increased substantially since 2009; this makes the FCC's competitive claims even less sustainable today.
It's damning enough to the FCC's case that there is no marketplace evidence of such conduct or its anticompetitive effects in today's market. But it's truly impossible to square the FCC's assertions about Comcast's anticompetitive incentives with the fact that, over the past decade, Comcast has made massive investments in broadband, steadily increased broadband speeds, and freely licensed its programming, among other things that have served to enhance OVDs' long-term viability and growth. Chalk it up to the threat of regulatory intervention or corporate incompetence if you can't believe that competition alone could be responsible for this largesse, but, whatever the reason, the FCC staff's fears appear completely unfounded in a marketplace not significantly different than the landscape that would have existed post-merger.
After describing the "new entrants" in the market — such unfamiliar and powerless players as Dish, Sony, HBO, and CBS — Sallet claimed that the staff was principally animated by the understanding that
Entrants are particularly vulnerable when competition is nascent. Thus, staff was particularly concerned that this transaction could damage competition in the video distribution industry.
Sallet's description of OVDs makes them sound like struggling entrepreneurs working in garages. But, in fact, OVDs have radically reshaped the media business and wield enormous clout in the marketplace.
Netflix, for example, describes itself as "the world's leading Internet television network with over 65 million members in over 50 countries." New services like Sony Vue and Sling TV are affiliated with giant, well-established media conglomerates. And whatever new offerings emerge from the FCC-approved AT&T/DIRECTV merger will be as well-positioned as any in the market.
In fact, we already know that the concerns of the FCC are off-base because they are of a piece with the misguided assumptions that underlie the Chairman's recent NPRM to rewrite the MVPD rules to "protect" just these sorts of companies. But the OVDs themselves — the ones with real money and their competitive futures on the line — don't see the world the way the FCC does, and they've resolutely rejected the Chairman's proposal. Notably, the proposed rules would "protect" these services from exactly the sort of conduct that Sallet claims would have been a consequence of the Comcast-TWC merger.
If they don't want or need broad protection from such "harms" in the form of revised industry-wide rules, there is surely no justification for the FCC to throttle a merger based on speculation that the same conduct could conceivably arise in the future.
While a larger Comcast might be in a position to realize more of the benefits from the exclusionary strategy Sallet described, it would also incur more of the costs — likely in direct proportion to the increased size of its subscriber base.
Think of it this way: To the extent that an MVPD can possibly constrain an OVD's scope of distribution for programming, doing so also necessarily makes the MVPD's own broadband offering less attractive, forcing it to incur a cost that would increase in proportion to the size of the distributor's broadband market. In this case, as noted, Comcast would have gained MVPD subscribers — but it would have also gained broadband subscribers. In a world where cable is consistently losing video subscribers (as Sallet acknowledged), and where broadband offers higher margins and faster growth, it makes no economic sense that Comcast would have valued the trade-off the way the FCC claims it would have.
Moreover, in light of the existing conditions imposed on Comcast under the Comcast/NBCU merger order from 2011 (which last for a few more years) and the restrictions adopted in the Open Internet Order, Comcast's ability to engage in the sort of exclusionary conduct described by Sallet would be severely limited, if not non-existent. Nor, of course, is there any guarantee that former or would-be OVD subscribers would choose to subscribe to, or pay more for, any MVPD in lieu of OVDs. Meanwhile, many of the relevant substitutes in the MVPD market (like AT&T and Verizon FiOS) also offer broadband services – thereby increasing the costs that would be incurred in the broadband market even more, as many subscribers would shift not only their MVPD, but also their broadband service, in response to Comcast degrading OVDs.
And speaking of the Open Internet Order — wasn't that supposed to prevent ISPs like Comcast from acting on their alleged incentives to impede the quality of, or access to, edge providers like OVDs? Why is merger enforcement necessary to accomplish the same thing once Title II and the rest of the Open Internet Order are in place? And if the argument is that the Open Internet Order might be defeated, aside from the completely speculative nature of such a claim, why wouldn't a merger condition that imposed the same constraints on Comcast – as was done in the Comcast/NBCU merger order by imposing the former net neutrality rules on Comcast – be perfectly sufficient?
While the FCC staff analysis accepted as true (again, contrary to current marketplace evidence) that a bigger Comcast would have more incentive to harm OVDs post-merger, it rejected arguments that there could be countervailing benefits to OVDs and others from this same increase in scale. Thus, things like incremental broadband investments and speed increases, a larger Wi-Fi network, and greater business services market competition – things that Comcast is already doing and would have done on a greater and more-accelerated scale in the acquired territories post-transaction – were deemed insufficient to outweigh the expected costs of the staff's entirely speculative anticompetitive theory.
In reality, however, not only OVDs, but consumers – and especially TWC subscribers – would have benefitted from the merger by access to Comcast's faster broadband speeds, its new investments, and its superior video offerings on the X1 platform, among other things. Many low-income families would have benefitted from expansion of Comcast's Internet Essentials program, and many businesses would have benefited from the addition of a more effective competitor to the incumbent providers that currently dominate the business services market. Yet these and other verifiable benefits were given short shrift in the agency's analysis because they "were viewed by staff as incapable of outweighing the potential harms."
Sallet's claim that the combined firm would have 60% of all high-speed broadband subscribers in the U.S. necessarily assumes a national broadband market measured at 25 Mbps or higher, which is a red herring.
The FCC has not explained why 25 Mbps is a meaningful benchmark for antitrust analysis. The FCC itself endorsed a 10 Mbps baseline for its Connect America fund last December, noting that over 70% of current broadband users subscribe to speeds less than 25 Mbps, even in areas where faster speeds are available. And streaming online video, the most oft-cited reason for needing high bandwidth, doesn't require 25 Mbps: Netflix says that 5 Mbps is the most that's required for an HD stream, and the same goes for Amazon (3.5 Mbps) and Hulu (1.5 Mbps).
What's more, by choosing an arbitrary, faster speed to define the scope of the broadband market (in an effort to assert the non-competitiveness of the market, and thereby justify its broadband regulations), the agency has – without proper analysis or grounding, in my view – unjustifiably shrunk the size of the relevant market. But, as it happens, doing so also shrinks the size of the increase in "national market share" that the merger would have brought about.
Recall that the staff's theory was premised on the idea that the merger would give Comcast control over enough of the broadband market that it could unilaterally impose costs on OVDs sufficient to impair their ability to reach or sustain minimum viable scale. But Comcast would have added only one percent of this invented "market" as a result of the merger. It strains credulity to assert that there could be any transaction-specific harm from an increase in market share equivalent to a rounding error.
In any case, basing its rejection of the merger on a manufactured 25 Mbps relevant market creates perverse incentives and will likely do far more to harm OVDs than realization of even the staff's worst fears about the merger ever could have.
The FCC says it wants higher speeds, and it wants firms to invest in faster broadband. But here Comcast did just that, and then was punished for it. Rather than acknowledging Comcast's ongoing broadband investments as strong indication that the FCC staff's analysis might be on the wrong track, the FCC leadership simply sidestepped that inconvenient truth by redefining the market.
The lesson is that if you make your product too good, you'll end up with an impermissibly high share of the market you create and be punished for it. This can't possibly promote the public interest.
Furthermore, the staff's analysis of competitive effects even in this ersatz market aren't likely supportable. As noted, most subscribers access OVDs on connections that deliver content at speeds well below the invented 25 Mbps benchmark, and they pay the same prices for OVD subscriptions as subscribers who receive their content at 25 Mbps. Confronted with the choice to consume content at 25 Mbps or 10 Mbps (or less), the majority of consumers voluntarily opt for slower speeds — and they purchase service from Netflix and other OVDs in droves, nonetheless.
The upshot? Contrary to the implications on which the staff's analysis rests, if Comcast were to somehow "degrade" OVD content on the 25 Mbps networks so that it was delivered with characteristics of video content delivered over a 10-Mbps network, real-world, observed consumer preferences suggest it wouldn't harm OVDs' access to consumers at all. This is especially true given that OVDs often have a global focus and reach (again, Netflix has 65 million subscribers in over 50 countries), making any claims that Comcast could successfully foreclose them from the relevant market even more suspect.
At the same time, while the staff apparently viewed the broadband alternatives as "limited," the reality is that Comcast, as well as other broadband providers, are surrounded by capable competitors, including, among others, AT&T, Verizon, CenturyLink, Google Fiber, many advanced VDSL and fiber-based Internet service providers, and high-speed mobile wireless providers. The FCC understated the complex impact of this robust, dynamic, and ever-increasing competition, and its analysis entirely ignored rapidly growing mobile wireless broadband competition.
Finally, as noted, Sallet claimed that the staff determined that merger conditions would be insufficient to remedy its concerns, without any further explanation. Yet the Commission identified similar concerns about OVDs in both the Comcast/NBCUniversal and AT&T/DIRECTV transactions, and adopted remedies to address those concerns. We know the agency is capable of drafting behavioral conditions, and we know they have teeth, as demonstrated by prior FCC enforcement actions. It's hard to understand why similar, adequate conditions could not have been fashioned for this transaction.
In the end, while I appreciate Sallet's attempt to explain the FCC's decision to reject the Comcast/TWC merger, based on the foregoing I'm not sure that Comcast could have made any argument or showing that would have dissuaded the FCC from challenging the merger. Comcast presented a strong economic analysis answering the staff's concerns discussed above, all to no avail. It's difficult to escape the conclusion that this was a politically-driven result, and not one rigorously based on the facts or marketplace reality.
On September 23, former Florida Governor Jeb Bush authored a short Wall Street Journal op-ed that set forth his ideas for curbing the "regulation tax." Governor Bush's op-ed focuses on a host of particulars – including, for example, repealing specific onerous Environmental Protection rules, repealing significant parts of the Dodd-Frank Act, repealing and replacing Obamacare, putting federal agencies on a "regulatory budget" (requiring a dollar of regulatory savings per each dollar of regulatory costs proposed), curbing frivolous regulatory litigation, streamlining regulatory approval processes, and a greater emphasis on private and state-driven solutions. Logical extensions of these initiatives, such as supplemental executive orders putting more "teeth" into routine regulatory review and support for the REINS Act (which would require congressional approval of "major" regulations), readily suggest themselves.
Regulatory reform initiatives have a long history. A particularly notable example is the Reagan Administration's 1981 efforts to curb excessive regulation through the Task Force on Regulatory Relief, which was linked to systematic White House review (through the Office of Management and Budget) of significant proposed regulations – a process that continues to this day (albeit imperfectly, to say the least). It is to be hoped that all other presidential candidates will also think about and prepare their own regulatory reform proposals. This should not be deemed a partisan issue. President Carter, after all, promoted regulatory reform and ushered in welfare-enhancing transportation deregulation, and President Clinton touted deregulation accomplished during the first term of his presidency.)
In short, done properly, reducing regulatory burdens should "supercharge" U.S. economic growth and enhance efficiency, without harming consumers or the environment – indeed, consumers and the environment should benefit long-term from smarter, streamlined, cost-beneficial regulation.
In reaching its holding, the Ninth Circuit decided that fair use should not be considered an affirmative defense–which is to say that it is not properly considered after an allegation, but must be considered when determining whether a prima facie claim exists. It starts from the text of the Copyright Act itself. According to 17 U.S.C. § 107
Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work … is not an infringement of copyright.
In support of its contention, the Ninth Circuit goes on to cite a case in the Eleventh Circuit as well as legislative material suggesting that Congress intended that fair use no longer be considered as an affirmative defense. Thus, in the Ninth Circuit's view, such fair use at best qualifies as a sort of quasi-defense, and most likely constitutes an element of an infringement claim. After all, if fair use is literally non-infringing, then establishing infringement requires ruling out fair use, as well.
Or so says the Ninth Circuit. But it takes little more than a Google search — let alone the legal research one should expect of federal judges and their clerks — to realize that the court is woefully, and utterly, incorrect.
The Supreme Court has been perfectly clear that fair use is in fact an affirmative defense. In Campbell v. Acuff-Rose, the Supreme Court had occasion to consider the nature of fair use under § 107 in the context of determining whether 2 Live Crew's parody of Roy Orbison's "Pretty Woman" was a permissible use. In considering the fourth fair use factor, "the effect of the use upon the potential market for or value of the copyrighted work," the Court held that "[s]ince fair use is an affirmative defense, its proponent would have difficulty carrying the burden of demonstrating fair use without favorable evidence about relevant markets."
Further, in reaching this opinion the Court relied on its earlier precedent in Harper & Row, where, in discussing the "purpose of the use" prong of § 107, the Court said that "[t]he drafters [of § 107] resisted pressures from special interest groups to create presumptive categories of fair use, but structured the provision as an affirmative defense requiring a case-by-case analysis." Not surprisingly, other courts are inclined to follow the the Supreme Court. Thus the Eleventh Circuit, the Southern District of New York, and the Central District of California (here and here), to name but a few, all explicitly refer to fair use as an affirmative defense. Oh, and the Ninth Circuit did too, at least until Lenz.
As part of its appeal, Universal relied on the settled notion that fair use is an affirmative defense in building its case. Perhaps because this understanding of fair use is so well established, Universal failed to cite extensively why this was so. And so (apparently unable to perform its own legal research), the Ninth Circuit dismissed § 107 as an affirmative defense out of hand, claiming that
Universal's sole textual argument is that fair use is not "authorized by the law" because it is an affirmative defense that excuses otherwise infringing conduct … Supreme Court precedent squarely supports the conclusion that fair use does not fall into the latter camp: "[A]nyone who . . . makes a fair use of the work is not an infringer of the copyright with respect to such use." Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 433 (1984)."
It bears noting that the Court in Sony Corp. did not discuss whether or not fair use is an affirmative defense, whereas Acuff Rose (decided 10 years after Sony Corp.) and Harper & Row decisions do.
To shore up its argument, the Ninth Circuit then goes on to cite the Eleventh Circuit for the notion that the 1976 Act fundamentally changed the nature of fair use, moving it away from its affirmative defense roots. Quoting Bateman v. Mnemonics, Inc., the court claims that
Although the traditional approach is to view "fair use" as an affirmative defense, . . . it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.
But wait — didn't I list the Eleventh Circuit as one of the (many) courts that have held fair use to be an affirmative defense? Why yes I did. It turns out that, as Devlin Hartline pointed out last week, the Ninth Circuit actually ripped the Eleventh Circuit text completely out of context. The full Bateman quote (from a footnote, it should be noted) is as follows:
Fair use traditionally has been treated as an affirmative defense to a charge of copyright infringement …. In viewing fair use as an excused infringement, the court must, in addressing this mixed question of law and fact, determine whether the use made of the original components of a copyrighted work is "fair" under 17 U.S.C. § 107 … Although the traditional approach is to view "fair use" as an affirmative defense, this writer, speaking only for himself, is of the opinion that it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer." (internal citations omitted, but emphasis added)
Better yet, in a subsequent opinion the Eleventh Circuit further clarified the position that the view of fair use as an affirmative defense is binding Supreme Court precedent, notwithstanding any judge's personal preferences to the contrary.
But that's not the worst of it. Not only did the court shamelessly misquote the Eleventh Circuit in stretching to find a justification for its prefered position, the court actually ignored its own precedent to the contrary. In Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., the Ninth Circuit held that
Since fair use is an affirmative defense, [the Defendant-Appellants] must bring forward favorable evidence about relevant markets. Given their failure to submit evidence on this point … we conclude that "it is impossible to deal with [fair use] except by recognizing that a silent record on an important factor bearing on fair use disentitle[s] the proponent of the defense[.]
Further, even if the Lenz court is correct that § 107 "unambiguously contemplates fair use as a use authorized by the law" — despite Supreme Court precedent — the authority the Ninth Circuit attempts to rely upon would still require defendants to raise a fair use defense after a prima facie claim was made, as "the burden of proving fair use is always on the putative infringer."
As with all other affirmative defenses, a plaintiff must first make out a prima facie case before the defense can be raised. So how do we make sense of the language in § 107 that determines fair use to not be infringement? In essence, it appears to be a case of inartful drafting. Particularly in light of the stated aims of the DMCA — a law that was enacted after the Supreme Court established that fair use was an affirmative defense — the nature of fair use as an affirmative defense that can only be properly raised by an accused infringer is as close to black letter law as it gets.
The DMCA was enacted to strike a balance between the interests of rightsholders in protecting their property, and the interests of society in having an efficient mechanism for distributing content. Currently, rightsholders send out tens of millions of takedown notices every year to deal with the flood of piracy and other infringing uses. If rightsholders were required to consider fair use in advance of each of these, the system would be utterly unworkable — for instance, in Google's search engine alone, over 54 million removal requests were made in just the month of August 2015 owing to potential copyright violations. While the evisceration of the DMCA is, of course, exactly what the plaintiffs (or more accurately, EFF, which represented the plaintiffs) in Lenz wanted, it's not remotely what the hard-wrought compromise of the statute contemplates.
And the reason it would be unworkable is not just because of the volume of the complaints, but because fair use is such an amorphous concept that ultimately requires adjudication.
Not only are there four factors to consider in a fair use analysis, but there are no bright line rules to guide the application of the factors. The open ended nature of the defense essentially leaves it up to a defendant to explain just why his situation should not constitute infringement. Until a judge or a jury says otherwise, how is one to know whether a particular course of conduct qualifies for a fair use defense?
The Lenz court even acknowledges as much when it says
If, however, a copyright holder forms a subjective good faith belief the allegedly infringing material does not constitute fair use, we are in no position to dispute the copyright holder's belief even if we would have reached the opposite conclusion. (emphasis added)
Thus, it is the slightest of fig leaves that is necessary to satisfy the Lenz court's new requirement that fair use be considered before issuing a takedown notice.
What's more, this statement from the court also demonstrates the near worthlessness of reading a prima facie fair use requirement into the takedown requirements. Short of a litigant explicitly disclaiming any efforts to consider fair use, the standard could be met with a bare assertion. It does, of course, remain an open question whether the computer algorithms the rightsholders employ in scanning for infringing content are actually capable of making fair use determinations — but perhaps throwing a monkey wrench — any monkey wrench — into the rightsholders' automated notice-and-takedown systems was all the court was really after. I think we can at least be sure that that was EFF's aim, anyway, as they apparently think that § 512 tends to be a tool of censorship in the hands of rightsholders.
The structure of the takedown and put-back provisions of the DMCA also cut against the Lenz court's view. The put-back requirements of Section 512(g) suggest that affirmative defenses and other justifications for accused infringement would be brought up after a takedown notice was submitted. What would be the purpose of put-back response, if not to offer the accused infringers justifications and defenses to an allegation of infringement? Along with excuses such as having a license, or a work's copyright being expired, an alleged infringer can bring up the fair use grounds under which he believed he was entitled to use the work in question.
In short, to require a rightsholder to analyze fair use in advance of a takedown request effectively requires her to read the mind of an infringer and figure out what excuse that party plans to raise as part of her defense. This surely can't have been what Congress intended with the takedown provisions of the DMCA — enacted as they were years after the Supreme Court had created the widely recognized rule that fair use is an affirmative defense.
Well, widely recognized, that is, except in the Ninth Circuit. This month, anyway.
Update: I received some feedback on this piece which pointed out an assumption I was making with respect to the Ninth Circuit's opinion, and which deserves a clarifying note. Essentially, the Lenz court splits the concept of affirmative defenses into two categories: (1) an affirmative defense that is merely a label owing to the procedural posture of a case and (2) an affirmative defense, as it is traditionally understood and that always puts the burden of production on a defendant. By characterizing affirmative defenses in this way, the Lenz court gets to have its cake and eat it too: when an actual proceeding is filed, a defendant will procedurally have the burden of production on the issue, but since fair use is at most a quasi-affirmative defense, the court felt it was fair to shift that same burden onto rightsholders when issuing a takedown letter. So technically the court says that fair use is an affirmative defense (as a labeling matter), but it does not practically treat is as such for the purposes of takedown notices.
In his seminal 1984 article, The Limits of Antitrust, Judge Frank Easterbrook proposed that courts and enforcers adopt a simple set of screening rules for application in antitrust cases, in order to minimize error and decision costs and thereby maximize antitrust's social value. Over time, federal courts in general—and the U.S. Supreme Court in particular, under Chief Justice Roberts—have in substantial part adopted Easterbrook's "limits of antitrust" approach, thereby helping to reduce costly antitrust uncertainty. Recently, however, antitrust enforcers in the Obama Administration (unlike their predecessors in the Reagan, Bush, and Clinton Administrations) have been less attuned to this approach, and have undertaken initiatives that reduce clarity and predictability in antitrust enforcement. Regardless of the cause of the diverging stances on the limits of antitrust, two things are clear. First, recent enforcement agency policies are severely at odds with the philosophy that informs Supreme Court antitrust jurisprudence. Second, if the agencies do not reverse course, acknowledge antitrust's limits, and seek to optimize the law in light of those limits, consumers will suffer.
Let us hope that error cost considerations figure more prominently in antitrust enforcement under the next Administration.
These considerations should be brought to bear in assessing the implications of the 2014 European Union (EU) Damages Actions Directive (Directive), which is expected to yield a dramatic increase in private competition law enforcement in the EU. The Directive establishes standards EU nations must adopt for the bringing of private competition lawsuits, including class actions. The 28 EU member states have until December 27, 2016 to adopt national laws, regulations, and administrative provisions that implement the Directive. In short, the Directive (1) makes it easier for private plaintiffs to have access to evidence; (2) gives a final finding of violation by a national competition agency conclusive effect in private actions brought in national courts and prima facie presumptive effect in private actions brought in other EU nations; (3) establishes clear and uniform statutes of limitation; (4) allows both direct and indirect purchasers of overpriced goods to bring private actions; (5) clarifies that private victims are entitled to full compensation for losses suffered, including compensation for actual loss and for loss of profit, plus interest; (6) establishes a rebuttable presumption that cartels cause harm; and (7) provides for joint and several liability (any participant in a competition law infringement will be responsible towards the victims for the whole harm caused by the infringement, but may seek contribution from other infringers).
By facilitating the bringing of lawsuits for cartel overcharges by both direct and indirect purchasers (see here), the Directive should substantially expand private cartel litigation in Europe. (It may also redirect some cartel-related litigation from United States tribunals, which up to now have been the favorite venues for such actions. Potential treble damages recoveries still make U.S. antitrust courts an attractive venue, but limitations on indirect purchaser suits and Sherman Act jurisdictional constraints requiring a "direct, substantial and reasonably foreseeable effect" effect on U.S. commerce create complications for foreign plaintiffs.) Given the fact that cartels have no redeeming features, this feature may be expected to increase disincentives for cartel conduct and thereby raise welfare. (The degree of welfare enhancement depends on the extent to which legitimate activity may be misidentified as cartel conduct, yielding "false positive" damage actions.)
The outlook is less sanguine for non-cartel cases, however. The Directive applies equally to vertical restraints and abuse of dominance cases, which are far more likely to yield false positives. In my experience, EU enforcers are more comfortable than U.S. enforcers at pursuing cases based on attenuated theories of exclusionary conduct that have a weak empirical basis. (The EU's continued investigation of Google, based on economically inappropriate theories that were rejected by the U.S. FTC, is a prime example.) In particular, the implementation of the Directive will raise the financial risks for "dominant" or "potentially dominant" firms operating in Europe, who may be further disincentivized from undertaking novel welfare-enhancing business practices that preserve or raise their market share. This could further harm the vitality of the European business sector.
Hopefully, individual EU states will seek to implement the Directive in a manner that takes into account the serious risk of false positives in non-cartel cases. The welfare implications of the Directive's implementation are well worth further competition law scholarship.
1. Wyndham: An Overview
Rather than "reinventing the wheel," let me begin by quoting at length from Gus Hurwitz's excellent summary of the relevant considerations in this case:
In 2012, the FTC sued Wyndham Worldwide, the parent company and franchisor of the Wyndham brand of hotels, arguing that its allegedly lax data security practices allowed hackers to repeatedly break into its franchisees' computer systems. The FTC argued that these breaches resulted in harm to consumers totaling over $10 million in fraudulent activity. The FTC brought its case under Section 5 of the FTC Act, which declares "unfair and deceptive acts and practices" to be illegal. The FTC's basic arguments are that it was, first, deceptive for Wyndham – which had a privacy policy indicating how it handled customer data – to assure consumers that the company took industry-standard security measures to protect customer data; and second, independent of any affirmative assurances that customer data was safe, it was unfair for Wyndham to handle customer data in an insecure way.
This case arose in the broader context of the FTC's efforts to establish a general law of data security. Over the past two decades, the FTC has begun aggressively pursuing data security claims against companies that suffer data breaches. Almost all of these cases have settled out of court, subject to consent agreements with the FTC. The Commission points to these agreements, along with other public documents that it views as guidance, as creating a "common law of data security." Responding to a request from the Third Circuit for supplemental briefing on this question, the FTC asserted in no uncertain terms its view that "the FTC has acted under its procedures to establish that unreasonable data security practices that harm consumers are indeed unfair within the meaning of Section 5."
Shortly after the FTC's case was filed, Wyndham asked the District Court judge to dismiss the case, arguing that the FTC didn't have authority under Section 5 to take action against a firm that had suffered a criminal theft of its data. The judge denied this motion. But, recognizing the importance and uncertainty of part of the issue – the scope of the FTC's "unfairness" authority – she allowed Wyndham to immediately appeal that part of her decision. The Third Circuit agreed to hear the appeal, framing the question as whether the FTC has authority to regulate cybersecurity under its Section 5 "unfairness" authority, and, if so, whether the FTC's application of that authority satisfied Constitutional Due Process requirements. Oral arguments were heard last March, and the court's opinion was issued on Monday [August 24]. . . .
In its opinion, the Court of Appeals rejects Wyndham's arguments that its data security practices cannot be unfair. As such, the case will be allowed to proceed to determine whether Wyndham's security practices were in fact "unfair" under Section 5. . . .
Recall the setting in which this case arose: the FTC has spent more than a decade trying to create a general law of data security. The reason this case was – and still is – important is because Wyndham was challenging the FTC's general law of data security.
But the court, in the second part of its opinion, accepts Wyndham's arguments that the FTC has not developed such a law. This is central to the court's opinion, because different standards apply to interpretations of laws that courts have developed as opposed to those that agencies have developed. The court outlines these standards, explaining that "a higher standard of fair notice applies [in the context of agency rules] than in the typical civil statutory interpretation case because agencies engage in interpretation differently than courts."
The court goes on to find that Wyndham had sufficient notice of the requirements of Section 5 under the standard that applies to judicial interpretations of statutes. And it expressly notes that, should the district court decide that the higher standard applies – that is, if the court agrees to apply the general law of data security that the FTC has tried to develop in recent years – the court will need to reevaluate whether the FTC's rules meet Constitutional muster. That review would be subject to the tougher standard applied to agency interpretations of statutes.
Stressing the Third Circuit's statement that the FTC had failed to explain how it had "informed the public that it needs to look at [FTC] complaints and consent decrees for guidance[,]" Gus concludes that the Third Circuit's opinion indicates that the FTC "has lost its war to create a general law of data security" based merely on its prior actions. According to Gus:
The takeaway, it seems, is that the FTC does have the power to take action against bad security practices, but if it wants to do so in a way that shapes industry norms and legal standards – if it wants to develop a general law of data security – a patchwork of consent decrees and informal statements is insufficient to the task. Rather, it must either pursue its cases to a decision on the merits or develop legally binding rules through . . . rulemaking procedures.
2. Wyndham's Implications for the Scope of the FTC's Legal Authority
I highly respect Gus's trenchant legal and policy analysis of Wyndham. I believe, however, that it may somewhat understate the strength of the FTC's legal position going forward. The Third Circuit also explained (citations omitted):
Wyndham is only entitled to notice of the meaning of the statute and not to the agency's interpretation of the statute. . . .
[Furthermore,] Wyndham is entitled to a relatively low level of statutory notice for several reasons. Subsection 45(a) [of the FTC Act, which states "unfair acts or practices" are illegal] does not implicate any constitutional rights here. . . . It is a civil rather than criminal statute. . . . And statutes regulating economic activity receive a "less strict" test because their "subject matter is often more narrow, and because businesses, which face economic demands to plan behavior carefully, can be expected to consult relevant legislation in advance of action." . . . . In this context, the relevant legal rule is not "so vague as to be 'no rule or standard at all.'" . . . . Subsection 45(n) [of the FTC Act, as a prerequisite to a finding of unfairness,] asks whether "the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition." While far from precise, this standard informs parties that the relevant inquiry here is a cost-benefit analysis, . . . that considers a number of relevant factors, including the probability and expected size of reasonably unavoidable harms to consumers given a certain level of cybersecurity and the costs to consumers that would arise from investment in stronger cybersecurity. We acknowledge there will be borderline cases where it is unclear if a particular company's conduct falls below the requisite legal threshold. But under a due process analysis a company is not entitled to such precision as would eliminate all close calls. . . . Fair notice is satisfied here as long as the company can reasonably foresee that a court could construe its conduct as falling within the meaning of the statute. . . .
[In addition, in 2007, the FTC issued a guidebook on business data security, which] could certainly have helped Wyndham determine in advance that its conduct might not survive the [§ 45(n)] cost-benefit analysis. Before the [cybersecurity] attacks [on Wyndham's network], the FTC also filed complaints and entered into consent decrees in administrative cases raising unfairness claims based on inadequate corporate cybersecurity. . . . That the FTC Commissioners – who must vote on whether to issue a complaint . . . – believe that alleged cybersecurity practices fail the cost-benefit analysis of § 45(n) certainly helps companies with similar practices apprehend the possibility that their cybersecurity could fail as well.
In my view, a fair reading of this Third Circuit language is that: (1) courts should read key provisions of the FTC Act to encompass cybersecurity practices that the FTC finds are not cost-beneficial; and (2) the FTC's history of guidance and consent decrees regarding cybersecurity give sufficient notice to companies regarding the nature of cybersecurity plans that the FTC may challenge. Based on that reading, I conclude that even if a court adopts a very exacting standard for reviewing the FTC's interpretation of its own statute, the FTC is likely to succeed in future case-specific cybersecurity challenges, assuming that it builds a solid factual record that appears to meet cost-benefit analysis. Whether other Circuits would agree with the Third Circuit's analysis is, of course, open to debate (I myself suspect that they probably would).
3. Sound Policy in Light of Wyndham
Apart from our slightly different "takes" on the legal implications of the Third Circuit's Wyndham decision, I fully agree with Gus that, as a policy matter, the FTC's "patchwork of consent decrees and informal statements is insufficient to the task" of building a general law of cybersecurity. In a 2014 Heritage Foundation Legal Memorandum on the FTC and cybersecurity, I stated:
The FTC's regulation of business systems by decree threatens to stifle innovation by companies related to data security and to impose costs that will be passed on in part to consumers. Missing from the consent decree calculus is the question of whether the benefits in diminished data security breaches justify those costs—a question that should be at the heart of unfairness analysis. There are no indications that the FTC has even asked this question in fashioning data security consents, let alone made case-specific cost-benefit analyses. This is troubling.
Equally troubling is the that the FTC apparently expects businesses to divine from a large number of ad hoc, fact-specific consent decrees with varying provisions what they must do vis-à-vis data security to avoid possible FTC targeting. The uncertainty engendered by sole reliance on complicated consent decrees for guidance (in the absence of formal agency guidelines or litigated court decisions) imposes additional burdens on business planners. . . .
[D]ata security investigations that are not tailored to the size and capacity of the firm may impose competitive disadvantages on smaller rivals in industries in which data protection issues are paramount.
Moreover, it may be in the interest of very large firms to support costlier and more intrusive FTC data security initiatives, knowing that they can better afford the adoption of prohibitively costly data security protocols than their smaller competitors can. This is an example of a "raising rivals' costs" strategy, which reduces competition by crippling or eliminating rivals.
Given these and related concerns (including the failure of existing FTC reports to give appropriate guidance), I concluded, among other recommendations, that:
[T]he FTC should issue data security guidelines that clarify its enforcement policy regarding data security breaches pursuant to Section 5 of the Federal Trade Commission Act. Such guidelines should be framed solely as limiting principles that tie the FTC's hands to avoid enforcement excesses. They should studiously avoid dictating to industry the data security principles that firms should adopt. . . .
[T]he FTC should [also] employ a strict cost-benefit analysis before pursuing any new regulatory initiatives, legislative recommendations, or investigations related to other areas of data protection, such as data brokerage or the uses of big data.
In sum, the Third Circuit's Wyndham decision, while interesting, in no way alters the fact that the FTC's existing cybersecurity enforcement program is inadequate and unsound. Whether through guidelines or formal FTC rules (which carry their own costs, including the risk of establishing inflexible standards that ignore future changes in business conditions and technology), the FTC should provide additional guidance to the private sector, rooted in sound cost-benefit analysis. The FTC should also be ever mindful of the costs it imposes on the economy (including potential burdens on business innovation) whenever it considers bringing enforcement actions in this area.
4. Conclusion
The debate over the appropriate scope of federal regulation of business cybersecurity programs will continue to rage, as serious data breaches receive public attention and the FTC considers new initiatives. Let us hope that, as we move forward, federal regulators will fully take into account costs as well as benefits – including, in particular, the risk that federal overregulation will undermine innovation, harm businesses, and weaken the economy.
TOTM's own Alden Abbott posted his view of the decision, and there are a couple of points we'd like to respond to, both embodied in this quote:
[The ITC's Suprema decision] would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference … Furthermore, the en banc majority's willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of [Limelight v.] Akamai.
In truth, we are of two minds (four minds?) regarding this view. We're deeply sympathetic with arguments that the Supreme Court has become — and should become — increasingly skeptical of blind Chevron deference. Recently, we filed a brief on the 2015 Open Internet Order that, in large part, argued that the FCC does not deserve Chevron deference under King v. Burwell, UARG v. EPA and Michigan v. EPA (among other important cases) along a very similar line of reasoning. However, much as we'd like to generally scale back Chevron deference, in this case we happen to think that the Federal Circuit got it right.
Put simply, "infringe" as used in § 337 plainly includes indirect infringement. Section 271 of the Patent Act makes it clear that indirect infringers are guilty of "infringement." The legislative history of the section, as well as Supreme Court case law, makes it very clear that § 271 was a codification of both direct and indirect liability.
In taxonomic terms, § 271 codifies "infringement" as a top-level category, with "direct infringement" and "indirect infringement" as two distinct subcategories of infringement. The law further subdivides "indirect infringement" into sub-subcategories, "inducement" and "contributory infringement." But all of these are "infringement."
For instance, § 271(b) says that "[w]hoever actively induces infringement of a patent shall be liable as an infringer" (emphasis added). Thus, in terms of § 271, to induce infringement is to commit infringement within the meaning of the patent laws. And in § 337, assuming it follows § 271 (which seems appropriate given Congress' stated purpose to "make it a more effective remedy for the protection of United States intellectual property rights" (emphasis added)), it must follow that when one imports "articles… that infringe" she can be liable for either (or both) § 271(a) direct infringement or § 271(b) inducement.
Frankly, we think this should end the analysis: There is no Chevron question here because the Tariff Act isn't ambiguous.
But although it seems clear on the face of § 337 that "infringe" must include indirect infringement, at the very least § 337 is ambiguous and cannot clearly mean only "direct infringement." Moreover, the history of patent law as well as the structure of the ITC's powers both cut in favor of the ITC enforcing the Tariff Act against indirect infringers. The ITC's interpretation of any ambiguity in the term "articles… that infringe" is surely reasonable.
Assuming for argument's sake that § 337's lack of specificity leaves room for debate as to what "infringe" means, there is nothing that militates definitively against indirect liability being included in § 337. The majority handles any ambiguity of this sort well:
[T]he shorthand phrase "articles that infringe" does not unambiguously exclude inducement of post-importation infringement… By using the word "infringe," § 337 refers to 35 U.S.C. § 271, the statutory provision defining patent infringement. The word "infringe" does not narrow § 337's scope to any particular subsections of § 271. As reflected in § 271 and the case law from before and after 1952, "infringement" is a term that encompasses both direct and indirect infringement, including infringement by importation that induces direct infringement of a method claim… Section 337 refers not just to infringement, but to "articles that infringe." That phrase does not narrow the provision to exclude inducement of post-importation infringement. Rather, the phrase introduces textual uncertainty.
Further, the court notes that it has consistently held that inducement is a valid theory of liability on which to base § 337 cases.
And lest you think that this interpretation would give some new, expansive powers to the ITC (perhaps meriting something like a Brown & Williamson exception to Chevron deference), the ITC is still bound by all the defenses and limitations on indirect liability under § 271. Saying it has authority to police indirect infringement doesn't give it carte blanche, nor any more power than US district courts currently have in adjudicating indirect infringement. In this case, the court went nowhere near the limits of Chevron in giving deference to the ITC's decision that "articles… that infringe" emcompasses the well-established (and statutorily defined) law of indirect infringement.
Nor does the Supreme Court's Limelight v. Akamai decision present any problem. Limelight is often quoted for the proposition that there can be no inducement liability without direct infringement. And it does stand for that, as do many other cases; that point is not really in any doubt. But what Alden and others (including the dissenters in Suprema) have cited it for is the proposition that inducement liability cannot attach unless all of the elements of inducement have already been practiced at the time of importation. Limelight does not support that contention, however.
Inducement liability contemplates direct infringement, but the direct infringement need not have been practiced by the same entity liable for inducement, nor at the same time as inducement (see, e.g., Standard Oil. v. Nippon). Instead, the direct infringement may come at a later time — and there is no dispute in Suprema regarding whether there was direct infringement (there was, as Suprema notes: "the Commission found that record evidence demonstrated that Mentalix had already directly infringed claim 19 within the United States prior to the initiation of the investigation.").
Limelight, on the other hand, is about what constitutes the direct infringement element in an inducement case. The sole issue in Limelight was whether this "direct infringement element" required that all of the steps of a method patent be carried out by a single entity or entities acting in concert. In Limelight's network there was a division of labor, so to speak, between the company and its customers, such that each carried out some of the steps of the method patent at issue. In effect, plaintiffs argued that Limelight should be liable for inducement because it practised some of the steps of the patented method, with the requisite intent that others would carry out the rest of the steps necessary for direct infringement. But neither Limelight nor its customers separately carried out all of the steps necessary for direct infringement.
The Court held (actually, it simply reiterated established law) that the method patent could never be violated unless a single party (or parties acting in concert) carried out all of the steps of the method necessary for direct infringement. Thus it also held that Limelight could not be liable for inducement because, on the facts of that case, none of its customers could ever be liable for the necessary, underlying direct infringement. Again — what was really at issue in Limelight were the requirements to establish the direct infringement necessary to prove inducement.
On remand, the Federal Circuit reinforced the point that Limelight was really about direct infringement and, by extension, who must be involved in the direct infringement element of an inducement claim. According to the court:
We conclude that the facts Akamai presented at trial constitute substantial evidence from which a jury could find that Limelight directed or controlled its customers' performance of each remaining method step. As such, substantial evidence supports the jury's verdict that all steps of the claimed methods were performed by or attributable to Limelight. Therefore, Limelight is liable for direct infringement.
The holding of Limelight is simply inapposite to the facts of Suprema. The crux of Suprema is whether the appropriate mens rea existed to support a claim of inducement — not whether the requisite direct infringement occurred or not.
Further, as the majority in Suprema notes, the very idea of inducement liability necessarily contemplates that there will be a temporal separation between the event that gives rise to indirect liability and the future direct infringement (required to prove inducement). As the Suprema court briefly noted "Section 337(a)(1)(B)'s 'sale . . . after importation' language confirms that the Commission is permitted to focus on post-importation activity to identify the completion of infringement."
In particular, each of the enforcement powers in § 337(a) contains a clause that, in addition to a prohibition against, e.g., infringing articles at the time of importation, also prohibits "the sale within the United States after importation by the owner, importer, or consignee, of articles[.]" Thus, Congress explicitly contemplated that the ITC would have the power to act upon articles at various points in time, not limiting it to a power effective only at the moment of importation.
Although the particular power to reach into the domestic market has to do with preventing the importer or its agent from making sales, this doesn't undermine the larger point here: the ITC's power to prevent infringing articles extends over a range of time. Given that "articles that … infringe" is at the very least ambiguous, and, as per the Federal Circuit (and our own position), this ambiguity allows for indirect infringement, it isn't a stretch to infer that that Congress intended the ITC to have authority under § 337 to ban the import of articles that induce infringement that occurs only after the time of importation..
To interpret § 337 otherwise would be to render it absurd and to create a giant loophole that would enable infringers to easily circumvent the ITC's enforcement powers.
The dissent also takes a curious approach to § 271 by mixing inducement and contributory infringement, and generally making a confusing mess of the two. For instance, Judge Dyk says
At the time of importation, the scanners neither directly infringe nor induce infringement… Instead, these staple articles may or may not ultimately be used to infringe… depending upon whether and how they are combined with domestically developed software after importation into the United States (emphasis added).
Whether or not the goods were "staples articles" (and thus potentially capable of substantial noninfringing uses) has nothing to do with whether or not there was inducement. Section 271 makes a very clear delineation between inducement in § 271(b) and contributory infringement in § 271(c). While a staple article of commerce capable of substantial noninfringing uses will not serve as the basis for a contributory infringement claim, it is irrelevant whether or not goods are such "staples" for purposes of establishing inducement.
The boundaries of inducement liability, by contrast, are focused on the intent of the actors: If there is an intent to induce, whether or not there is a substantial noninfringing use, there can be a violation of § 271. Contributory infringement and inducement receive treatment in separate paragraphs of § 271 and are separate doctrines comprising separate elements. This separation is so evident on the face of the law as well as in its history that the Supreme Court read the doctrine into copyright in Grokster — where, despite a potentially large number of non-infringing uses, the intent to induce infringement was sufficient to find liability.
We have some final thoughts on the Chevron question, because this is rightly a sore point in administrative law. In this case we think that the analysis should have ended at step one. Although the Federal Circuit began with an assumption of ambiguity, it was being generous to the appellants. Did Congress speak with clear intent? We think so. Section 271 very clearly includes direct infringement as well as indirect infringement within its definition of what constitutes infringement of a patent. When § 337 references "articles … that infringe" it seems fairly obvious that Congress intended the ITC to be able to enforce the prohibitions in § 271 in the context of imported goods.
But even if we advance to step two of the Chevron analysis, the ITC's construction of § 337 is plainly permissible — and far from expansive. By asserting its authority here the ITC is simply policing the importation of infringing goods (which it clearly has the power to do), and doing so in the case of goods that indirectly infringe (a concept that has been part of US law for a very long time). If "infringe" as used in the Tariff Act is ambiguous, the ITC's interpretation of it to include both indirect as well as direct infringement seems self-evidently reasonable.
Under the dissent's (and Alden's) interpretation of § 337, all that would be required to evade the ITC would be to import only the basic components of an article such that at the moment of importation there was no infringement. Once reassembled within the United States, the ITC's power to prevent the sale of infringing goods would be nullified. Section 337 would thus be read to simply write out the entire "indirect infringement" subdivision of § 271 — an inference that seems like a much bigger stretch than that "infringement" under § 337 means all infringement under § 271. Congress was more than capable of referring only to "direct infringement" in § 337 if that's what it intended.
Much as we would like to see Chevron limited, not every agency case is the place to fight this battle. If we are to have agencies, and we are to have a Chevron doctrine, there will be instances of valid deference to agency interpretations — regardless of how broadly or narrowly Chevron is interpreted. The ITC wasn't making a power grab in Suprema, nor was its reading of the statute unexpected, inconsistent with its past practice, or expansive.
In short, Suprema doesn't break any new statutory interpretation ground, nor present a novel question of "deep economic or political significance" akin to the question at issue in King v. Burwell. Like it or not, there will be no roots of an anti-Chevron-deference revolution growing out of Suprema.
When Josh was confirmed I wrote that:
The FTC will benefit enormously from Josh's expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy. His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation…. The Commissioners and staff at the FTC will surely… profit from his time there.
Whether others at the Commission have really learned from Josh is an open question, but there's no doubt that Josh offered an enormous amount from which they could learn. As Tim Muris said, Josh "did not disappoint, having one of the most important and memorable tenures of any non-Chair" at the agency.
Within a month of his arrival at the Commission, in fact, Josh "laid down the cost-benefit-analysis gauntlet" in a little-noticed concurring statement regarding a proposed amendment to the Hart-Scott-Rodino Rules. The technical details of the proposed rule don't matter for these purposes, but, as Josh noted in his statement, the situation intended to be avoided by the rule had never arisen:
The proposed rulemaking appears to be a solution in search of a problem. The Federal Register notice states that the proposed rules are necessary to prevent the FTC and DOJ from "expend[ing] scarce resources on hypothetical transactions." Yet, I have not to date been presented with evidence that any of the over 68,000 transactions notified under the HSR rules have required Commission resources to be allocated to a truly hypothetical transaction.
What Josh asked for in his statement was not that the rule be scrapped, but simply that, before adopting the rule, the FTC weigh its costs and benefits.
As I noted at the time:
[I]t is the Commission's responsibility to ensure that the rules it enacts will actually be beneficial (it is a consumer protection agency, after all). The staff, presumably, did a perfectly fine job writing the rule they were asked to write. Josh's point is simply that it isn't clear the rule should be adopted because it isn't clear that the benefits of doing so would outweigh the costs.
As essentially everyone who has contributed to this symposium has noted, Josh was singularly focused on the rigorous application of the deceptively simple concept that the FTC should ensure that the benefits of any rule or enforcement action it adopts outweigh the costs. The rest, as they say, is commentary.
For Josh, this basic principle should permeate every aspect of the agency, and permeate the way it thinks about everything it does. Only an entirely new mindset can ensure that outcomes, from the most significant enforcement actions to the most trivial rule amendments, actually serve consumers.
While the FTC has a strong tradition of incorporating economic analysis in its antitrust decision-making, its record in using economics in other areas is decidedly mixed, as Berin points out. But even in competition policy, the Commission frequently uses economics — but it's not clear it entirely understands economics. The approach that others have lauded Josh for is powerful, but it's also subtle.
Inherent limitations on anyone's knowledge about the future of technology, business and social norms caution skepticism, as regulators attempt to predict whether any given business conduct will, on net, improve or harm consumer welfare. In fact, a host of factors suggests that even the best-intentioned regulators tend toward overconfidence and the erroneous condemnation of novel conduct that benefits consumers in ways that are difficult for regulators to understand. Coase's famous admonition in a 1972 paper has been quoted here before (frequently), but bears quoting again:
If an economist finds something – a business practice of one sort or another – that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.
Simply "knowing" economics, and knowing that it is important to antitrust enforcement, aren't enough. Reliance on economic formulae and theoretical models alone — to say nothing of "evidence-based" analysis that doesn't or can't differentiate between probative and prejudicial facts — doesn't resolve the key limitations on regulatory decisionmaking that threaten consumer welfare, particularly when it comes to the modern, innovative economy.
As Josh and I have written:
[O]ur theoretical knowledge cannot yet confidently predict the direction of the impact of additional product market competition on innovation, much less the magnitude. Additionally, the multi-dimensional nature of competition implies that the magnitude of these impacts will be important as innovation and other forms of competition will frequently be inversely correlated as they relate to consumer welfare. Thus, weighing the magnitudes of opposing effects will be essential to most policy decisions relating to innovation. Again, at this stage, economic theory does not provide a reliable basis for predicting the conditions under which welfare gains associated with greater product market competition resulting from some regulatory intervention will outweigh losses associated with reduced innovation.
* * *
In sum, the theoretical and empirical literature reveals an undeniably complex interaction between product market competition, patent rules, innovation, and consumer welfare. While these complexities are well understood, in our view, their implications for the debate about the appropriate scale and form of regulation of innovation are not.
Along the most important dimensions, while our knowledge has expanded since 1972, the problem has not disappeared — and it may only have magnified. As Tim Muris noted in 2005,
[A] visitor from Mars who reads only the mathematical IO literature could mistakenly conclude that the U.S. economy is rife with monopoly power…. [Meanwhile, Section 2's] history has mostly been one of mistaken enforcement.
It may not sound like much, but what is needed, what Josh brought to the agency, and what turns out to be absolutely essential to getting it right, is unflagging awareness of and attention to the institutional, political and microeconomic relationships that shape regulatory institutions and regulatory outcomes.
Regulators must do their best to constantly grapple with uncertainty, problems of operationalizing useful theory, and, perhaps most important, the social losses associated with error costs. It is not (just) technicians that the FTC needs; it's regulators imbued with the "Economic Way of Thinking." In short, what is needed, and what Josh brought to the Commission, is humility — the belief that, as Coase also wrote, sometimes the best answer is to "do nothing at all."
The technocratic model of regulation is inconsistent with the regulatory humility required in the face of fast-changing, unexpected — and immeasurably valuable — technological advance. As Virginia Postrel warns in The Future and Its Enemies:
Technocrats are "for the future," but only if someone is in charge of making it turn out according to plan. They greet every new idea with a "yes, but," followed by legislation, regulation, and litigation…. By design, technocrats pick winners, establish standards, and impose a single set of values on the future.
For Josh, the first JD/Econ PhD appointed to the FTC,
economics provides a framework to organize the way I think about issues beyond analyzing the competitive effects in a particular case, including, for example, rulemaking, the various policy issues facing the Commission, and how I weigh evidence relative to the burdens of proof and production. Almost all the decisions I make as a Commissioner are made through the lens of economics and marginal analysis because that is the way I have been taught to think.
A representative example will serve to illuminate the distinction between merely using economics and evidence and understanding them — and their limitations.
In his Nielson/Arbitron dissent Josh wrote:
The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.
[W]e… do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.
Josh's straightforward statement of the basis for restraint stands in marked contrast to the majority's decision to impose antitrust-based limits on economic activity that hasn't even yet been contemplated. Such conduct is directly at odds with a sensible, evidence-based approach to enforcement, and the economic problems with it are considerable, as Josh also notes:
[I]t is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer the[] basic questions upon which proper merger analysis is based.
When the Commission's antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.
Compare in this regard Josh's words about Nielsen with Deborah Feinstein's defense of the majority from such charges:
The Commission based its decision not on crystal-ball gazing about what might happen, but on evidence from the merging firms about what they were doing and from customers about their expectations of those development plans. From this fact-based analysis, the Commission concluded that each company could be considered a likely future entrant, and that the elimination of the future offering of one would likely result in a lessening of competition.
Instead of requiring rigorous economic analysis of the facts, couched in an acute awareness of our necessary ignorance about the future, for Feinstein the FTC fulfilled its obligation in Nielsen by considering the "facts" alone (not economic evidence, mind you, but customer statements and expressions of intent by the parties) and then, at best, casually applying to them the simplistic, outdated structural presumption – the conclusion that increased concentration would lead inexorably to anticompetitive harm. Her implicit claim is that all the Commission needed to know about the future was what the parties thought about what they were doing and what (hardy disinterested) customers thought they were doing. This shouldn't be nearly enough.
Worst of all, Nielsen was "decided" with a consent order. As Josh wrote, strongly reflecting the essential awareness of the broader institutional environment that he brought to the Commission:
[w]here the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission's actions may alter private parties' behavior in a manner that does not enhance consumer welfare.
Obviously in this regard his successful effort to get the Commission to adopt a UMC enforcement policy statement is a most welcome development.
In short, Josh is to be applauded not because he brought economics to the Commission, but because he brought the economic way of thinking. Such a thing is entirely too rare in the modern administrative state. Josh's tenure at the FTC was relatively short, but he used every moment of it to assiduously advance his singular, and essential, mission. And, to paraphrase the last line of the movie The Right Stuff (it helps to have the rousing film score playing in the background as you read this): "for a brief moment, [Josh Wright] became the greatest [regulator] anyone had ever seen."
I would like to extend my thanks to everyone who participated in this symposium. The contributions here will stand as a fitting and lasting tribute to Josh and his legacy at the Commission. And, of course, I'd also like to thank Josh for a tenure at the FTC very much worth honoring.
Imagine a world where competition and consumer protection authorities base their final decisions on scientific evidence of potential harm. Imagine a world where well-intentioned policymakers do not use "possibility theorems" to rationalize decisions that are, in reality, based on idiosyncratic biases or beliefs. Imagine a world where "harm" is measured using a scientific yardstick that accounts for the economic benefits and costs of attempting to remedy potentially harmful business practices.
Many economists—conservatives and liberals alike—have the luxury of pondering this world in the safe confines of ivory towers; they publish in journals read by a like-minded audience that also relies on the scientific method.
Congratulations and thanks, Josh, for superbly articulating these messages in the more relevant—but more hostile—world outside of the ivory tower.
To those of you who might disagree with a few (or all) of Josh's decisions, I challenge you to examine honestly whether your views on a particular matter are based on objective (scientific) evidence, or on your personal, subjective beliefs. Evidence-based policymaking can be discomforting: It sometimes induces those with philosophical biases in favor of intervention to make laissez-faire decisions, and it sometimes induces people with a bias for non-intervention to make decisions to intervene.
Josh Wright will doubtless be remembered for transforming how FTC polices competition. Between finally defining Unfair Methods of Competition (UMC), and his twelve dissents and multiple speeches about competition matters, he re-grounded competition policy in the error-cost framework: weighing not only costs against benefits, but also the likelihood of getting it wrong against the likelihood of getting it right.
Yet Wright may be remembered as much for what he started as what he finished: reforming the Commission's Unfair and Deceptive Acts and Practices (UDAP) work. His consumer protection work is relatively slender: four dissents on high tech matters plus four relatively brief concurrences and one dissent on more traditional advertising substantiation cases. But together, these offer all the building blocks of an economic, error-cost-based approach to consumer protection. All that remains is for another FTC Commissioner to pick up where Wright left off.
In January 2014, Wright issued a blistering, 17 page dissent from the Commission's decision to bring, and settle, an enforcement action against Apple regarding the design of its app store. Wright dissented, not from the conclusion necessarily, but from the methodology by which the Commission arrived there. In essence, he argued for an error-cost approach to unfairness:
The Commission, under the rubric of "unfair acts and practices," substitutes its own judgment for a private firm's decisions as to how to design its product to satisfy as many users as possible, and requires a company to revamp an otherwise indisputably legitimate business practice. Given the apparent benefits to some consumers and to competition from Apple's allegedly unfair practices, I believe the Commission should have conducted a much more robust analysis to determine whether the injury to this small group of consumers justifies the finding of unfairness and the imposition of a remedy.
…. although Apple's allegedly unfair act or practice has harmed some consumers, I do not believe the Commission has demonstrated the injury is substantial. More importantly, any injury to consumers flowing from Apple's choice of disclosure and billing practices is outweighed considerably by the benefits to competition and to consumers that flow from the same practice.
The majority insisted that the burden on consumers or Apple from its remedy "is de minimis," and therefore "it was unnecessary for the Commission to undertake a study of how consumers react to different disclosures before issuing its complaint against Apple, as Commissioner Wright suggests."
Wright responded: "Apple has apparently determined that most consumers do not want to experience excessive disclosures or to be inconvenienced by having to enter their passwords every time they make a purchase." In essence, he argued, that the FTC should not presume to know better than Apple how to manage the subtle trade-offs between convenience and usability.
Wright was channeling Hayek's famous quip: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." The last thing the FTC should be doing is designing digital products — even by hovering over Apple's shoulder.
Wright next took the Commission to task for the lack of economic analysis in its May 2013 report, "Data Brokers: A Call for Transparency and Accountability." In just four footnotes, Wright extended his analysis of Apple. For example:
Footnote 85: Commissioner Wright agrees that Congress should consider legislation that would provide for consumer access to the information collected by data brokers. However, he does not believe that at this time there is enough evidence that the benefits to consumers of requiring data brokers to provide them with the ability to opt out of the sharing of all consumer information for marketing purposes outweighs the costs of imposing such a restriction. Finally… he believes that the Commission should engage in a rigorous study of consumer preferences sufficient to establish that consumers would likely benefit from such a portal prior to making such a recommendation.
Footnote 88: Commissioner Wright believes that in enacting statutes such as the Fair Credit Reporting Act, Congress undertook efforts to balance [costs and benefits]. In the instant case, Commissioner Wright is wary of extending FCRA-like coverage to other uses and categories of information without first performing a more robust balancing of the benefits and costs associated with imposing these requirements
This January, in a 4-page dissent from the FTC's staff report on "The Internet of Things: Privacy and Security in a Connected World," Wright lamented that the report neither represented serious economic analysis of the issues discussed nor synthesized the FTC's workshop on the topic:
A record that consists of a one-day workshop, its accompanying public comments, and the staff's impressions of those proceedings, however well-intended, is neither likely to result in a representative sample of viewpoints nor to generate information sufficient to support legislative or policy recommendations.
His attack on the report's methodology was blistering:
The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff's various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace…. I support the well-established Commission view that companies must maintain reasonable and appropriate security measures; that inquiry necessitates a cost-benefit analysis. The most significant drawback of the concepts of "security by design" and other privacy-related catchphrases is that they do not appear to contain any meaningful analytical content.
In April, Wright turned his analytical artillery from unfairness to deception, long the more uncontroversial half of UDAP. In a five-page dissent, Wright accused the Commission of essentially dispensing with the core limiting principle of the 1983 Deception Policy Statement: materiality. As Wright explained:
The materiality inquiry is critical because the Commission's construct of "deception" uses materiality as an evidentiary proxy for consumer injury…. Deception causes consumer harm because it influences consumer behavior — that is, the deceptive statement is one that is not merely misleading in the abstract but one that causes consumers to make choices to their detriment that they would not have otherwise made. This essential link between materiality and consumer injury ensures the Commission's deception authority is employed to deter only conduct that is likely to harm consumers and does not chill business conduct that makes consumers better off.
As in Apple, Wright did not argue that there might not be a role for the FTC; merely that the FTC had failed to justify bringing, let alone settling, an enforcement action without establishing that the key promise at issue — to provide in-store opt-out — was material.
In May, Wright gave a speech to the Chamber of Commerce on "How to Regulate the Internet of Things Without Harming its Future: Some Do's and Don'ts":
Perhaps it is because I am an economist who likes to deal with hard data, but when it comes to data and privacy regulation, the tendency to rely upon anecdote to motivate policy is a serious problem. Instead of developing a proper factual record that documents cognizable and actual harms, regulators can sometimes be tempted merely to explore anecdotal and other hypothetical examples and end up just offering speculations about the possibility of harm.
And on privacy in particular:
What I have seen instead is what appears to be a generalized apprehension about the collection and use of data — whether or not the data is actually personally identifiable or sensitive — along with a corresponding, and arguably crippling, fear about the possible misuse of such data. …. Any sensible approach to regulating the collection and use of data will take into account the risk of abuses that will harm consumers. But those risks must be weighed with as much precision as possible, as is the case with potential consumer benefits, in order to guide sensible policy for data collection and use. The appropriate calibration, of course, turns on our best estimates of how policy changes will actually impact consumers on the margin….
Wright concedes that the "vast majority of work that the Consumer Protection Bureau performs simply does not require significant economic analysis because they involve business practices that create substantial risk of consumer harm but little or nothing in the way of consumer benefits." Yet he notes that the Internet has made the need for cost-benefit analysis far more acute, at least where conduct is ambiguous as its effects on consumers, as in Apple, to avoid "squelching innovation and depriving consumers of these benefits."
Wright left all the building blocks his successor will need to bring "Wrightian" reform to how the Bureau of Consumer Protection works:
It's a testament to Wright's analytical clarity that he managed to say so much about consumer protection in so few words. That his UDAP work has received so little attention, relative to his competition work, says just as much about the far greater need for someone to do for consumer protection what Wright did for competition enforcement and policy at the FTC.
Wright's successor, if she's going to finish what Wright started, will need something approaching Wright's sheer intellect, his deep internalization of the error-costs approach, and his knack for brokering bipartisan compromise around major issues — plus the kind of passion for UDAP matters Wright had for competition matters. And, of course, that person needs to be able to continue his legacy on competition matters…
Compared to the difficulty of finding that person, actually implementing these reforms may be the easy part.
As the premier Antitrust scholar of his generation, Josh Wright's appointment to the Federal Trade Commission promised to be noteworthy. He did not disappoint, having one of the most important and memorable tenures of any non-Chair over the 40 years that I have followed the agency closely.
In numerous speeches, dissents, and a variety of other statements on matters before the Commission, Josh articulated important messages for Antitrust. In particular, his call for evidence-based decisions has been a welcome reminder of that crucial element of sound policy. Moreover, he has continued to recognize that most arguments over the Chicago school are stale, reflecting 20th century battles long decided.
Finally, a few words about one area of disagreement, the section 5 statement that the Commission issued shortly before Commissioner Wright's departure. Having witnessed firsthand the FTC's overreaching in the 1970s, in both Antitrust and Consumer Protection, I have long thought that section 5 should be read coextensive with the Sherman and Clayton Acts. There is no need, especially with the maturity of the Antitrust Laws represented by the many 21st-century Supreme Court decisions, for separate, more expensive enforcement under section 5. Even here, however, Josh Wright's numerous speeches and articles on the subject have demonstrated the continued relevance and importance of potential FTC overreaching.
I congratulate Commissioner Wright on his tenure, and look forward to decades to come of contributions on the issues facing the Antitrust and FTC communities.
The bright spot in federal antitrust enforcement in the last few years has been Josh Wright. Time and again, he has bucked the antitrust establishment, reminding the mandarins that their goal should not be to stop every instance of anticompetitive behavior but instead to optimize antitrust by minimizing the sum of error costs (from both false negatives and false positives) and decision costs. As Judge Easterbrook famously explained, and as Josh Wright has emphasized more than anyone I know, inevitable mistakes (error costs) and heavy information requirements (decision costs) constrain what antitrust can do. Every liability rule, every defense, every immunity doctrine should be crafted with those limits in mind.
Josh will no doubt be remembered, and justifiably so, for spearheading the effort to provide guidance on how the Federal Trade Commission will exercise its amorphous authority to police "unfair methods of competition." Several others have lauded Josh's fine contribution on that matter (as have I), so I won't gild that lily here. Instead, let me briefly highlight two other areas in which Josh has properly pushed for a recognition of antitrust's inherent limits.
Vertical Restraints
Vertical restraints—both intrabrand restraints like resale price maintenance (RPM) and interbrand restraints like exclusive dealing—are a competitive mixed bag. Under certain conditions, such restraints may reduce overall market output, causing anticompetitive harm. Under other, more commonly occurring conditions, vertical restraints may enhance market output. Empirical evidence suggests that most vertical restraints are output-enhancing rather than output-reducing. Enforcers taking an optimizing, limits of antitrust approach will therefore exercise caution in condemning or discouraging vertical restraints.
That's exactly what Josh Wright has done. In an early post-Leegin RPM order predating Josh's tenure, the FTC endorsed a liability rule that placed an inappropriately heavy burden on RPM defendants. Josh later laid the groundwork for correcting that mistake, advocating a much more evidence-based (and defendant-friendly) RPM rule. In the McWane case, the Commission condemned an exclusive dealing arrangement that had been in place for long enough to cause anticompetitive harm but hadn't done so. Josh rightly called out the majority for elevating theoretical harm over actual market evidence. (Adopting a highly deferential stance, the Eleventh Circuit affirmed the Commission majority, but Josh was right to criticize the majority's implicit hostility toward exclusive dealing.) In settling the Graco case, the Commission again went beyond the evidence, requiring the defendant to cease exclusive dealing and to stop giving loyalty rebates even though there was no evidence that either sort of vertical restraint contributed to the anticompetitive harm giving rise to the action at issue. Josh rightly took the Commission to task for reflexively treating vertical restraints as suspect when they're usually procompetitive and had an obvious procompetitive justification (avoidance of interbrand free-riding) in the case at hand.
Horizontal Mergers
Horizontal mergers, like vertical restraints, are competitive mixed bags. Any particular merger of competitors may impose some consumer harm by reducing the competition facing the merged firm. The same merger, though, may provide some consumer benefit by lowering the merged firm's costs and thereby allowing it to compete more vigorously (most notably, by lowering its prices). A merger policy committed to minimizing the consumer welfare losses from unwarranted condemnations of net beneficial mergers and improper acquittals of net harmful ones would afford equal treatment to claims of anticompetitive harm and procompetitive benefit, requiring each to be established by the same quantum of proof.
The federal enforcement agencies' new Horizontal Merger Guidelines, however, may put a thumb on the scale, tilting the balance toward a finding of anticompetitive harm. The Guidelines make it easier for the agencies to establish likely anticompetitive harm. Enforcers may now avoid defining a market if they point to adverse unilateral effects using the gross upward pricing pressure index (GUPPI). The merging parties, by contrast, bear a heavy burden when they seek to show that their contemplated merger will occasion efficiencies. They must: (1) prove that any claimed efficiencies are "merger-specific" (i.e., incapable of being achieved absent the merger); (2) "substantiate" asserted efficiencies; and (3) show that such efficiencies will result in the very markets in which the agencies have established likely anticompetitive effects.
In an important dissent (Ardagh), Josh observed that the agencies' practice has evolved such that there are asymmetric burdens in establishing competitive effects, and he cautioned that this asymmetry will enhance error costs. (Geoff praised that dissent here.) In another dissent (Family Dollar/Dollar Tree), Josh acknowledged some potential problems with the promising but empirically unverified GUPPI, and he wisely advocated the creation of safe harbors for mergers generating very low GUPPI scores. (I praised that dissent here.)
I could go on and on, but these examples suffice to illustrate what has been, in my opinion, Josh's most important contribution as an FTC commissioner: his constant effort to strengthen antitrust's effectiveness by acknowledging its inevitable and inexorable limits. Coming on the heels of the FTC's and DOJ's rejection of the Section 2 Report—a document that was highly attuned to antitrust's limits—Josh was just what antitrust needed.
The FTC was the brain child of Progressive Era technocrats who believed that markets could be made to run more effectively if distinguished experts in industry and economics were just put in charge. Alas, as former FTC Chair Bill Kovacic has chronicled, over the Commission's first century precious few of the Commissioners have been distinguished economists or business leaders. Rather, the Commissioners have been largely drawn from the ranks of politically connected lawyers, often filling patronage appointments.
How refreshing it's been to have Josh Wright, highly distinguished both as an economist and as a law professor, serve on the Commission. Much of the media attention to Josh has focused on his bold conservatism in antitrust and consumer protection matters. But Josh has made at least as much of a mark in advocating for the importance of economists and rigorous economic analysis at the Commission.
Josh has long proclaimed that his enforcement philosophy is evidence-based rather than a priori or ideological. He has argued that the Commission should bring enforcement actions when the economic facts show objective harm to consumers, and not bring actions when the facts don't show harm to consumers. A good example of Josh's perspective in action is his dissenting statement in the McWane case, where the Commission staff may have had a reasonable theory of foreclosure, but not enough economic evidence to back it up.
Among other things, Josh has eloquently advocated for the institutional importance of the economist's role in FTC decision making. Just a few weeks ago, he issued a statement on the Bureau of Economics, Independence, and Agency Performance. Josh began with the astute observation that, in disputes within large bureaucratic organizations, the larger group usually wins. He then observed that the lopsided ratio of lawyers in the Bureau of Competition to economists in the Bureau of Economics has led to lawyers holding the whip hand within the organization. This structural bias toward legal rather than economic reasoning has important implications for the substance of Commission decisions. For example, Malcolm Coate and Andrew Heimert's study of merger efficiencies claims at the FTC showed that economists in BE were far more likely than lawyers in BC to credit efficiencies claims. Josh's focus on the institutional importance of economists deserves careful consideration in future budgetary and resource allocation discussions.
In considering Josh's legacy, it's also important to note that Josh's prescriptions in favor of economic analysis were not uniformly "conservative" in the trite political or ideological sense. In 2013, Josh gave a speech arguing against the application of the cost-price test in loyalty discount cases. This surprised lots of people in the antitrust community, myself included. The gist of Josh's argument was that a legalistic cost-price test would be insufficiently attentive to the economic facts of a particular case and potentially immunize exclusionary behavior. I disagreed (and still disagree) with Josh's analysis and said so at the time. Nonetheless, it's important to note that Josh was acting consistently with his evidence-based philosophy, asking for proof of economic facts rather than reliance on legal short-cuts. To his great credit, Josh followed his philosophy regardless of whether it supported more or less intervention.
In sum, though his service was relatively short, Josh has left an important mark on the Commission, founded in his distinctive perspective as an economist. It is to be hoped that his appointment and service will set a precedent for more economist Commissioners in the future.
I join all the others in congratulating Professor Wright on his accomplishments at the FTC. As both an academic and government official myself, I've long benefited from Dr. Wright's work in academia and in government. I've also greatly enjoyed a ring-side view of the his upbeat and thoughtful manner for constructively engaging the diverse perspectives offered by personnel across the government, academic, and private sectors. Thanks to President Obama's nomination and the Senate's confirmation, Commissioner Wright consistently brought to bear a most serious and productive set of carefully considered ideas in both law and economics that he prudently adapted for helpful real world application. I thank Commissioner Wright for all that he has given to our country, and I wish him all continued success in the many important academic endeavors to which he has returned.
When a presidential appointee leaves office, it is quite common to consider the person's legacy to their department or agency. We are delighted to participate in this symposium and to reflect on the contributions of our friend, Commissioner Joshua Wright, to the Federal Trade Commission.
To be sure, Commissioner Wright's time at the FTC has been marked by no shortage of important votes, statements, speeches, testimony, and policy proposals that individually have had a positive and meaningful impact on the Commission and on antitrust policy more generally. In our view, however, the hallmark of Commissioner Wright's most recent stint at the Commission is found in two overarching principles that have guided his approach to pursuing the agency's mission of promoting consumer welfare and that, as a result, will be important considerations for those entrusted with selecting his replacement as well as future commissioners. We see those overarching principles as: (1) the rigorous application and ceaseless promotion of economics within the Commission and (2) the indefatigable participation in the marketplace of ideas.
A key characteristic of Commissioner Wright's tenure at the FTC has been his insistence on rigorously applying modern economic principles to US competition law enforcement. Given that competition law is in reality applied industrial organization economics, well-grounded economic analysis is essential to the Commission's discharge of its competition law enforcement functions. One would be concerned if there was not a trained surgeon in the operating room. Similarly, we are better served by a FTC that includes a professional economist among the ranks of its Commissioners. Indeed, no one has trumpeted the importance of incorporating modern economics into antitrust policy more than Commissioner Wright. Over the last two and a half years, Commissioner Wright has used his platform at the agency both to identify instances where the Commission's economic analysis failed to live up to its potential and to praise those many occasions on which the talented attorneys and economists worked together to promote economically sound policies and enforcement decisions that the Commission adopted. This increased scrutiny and engagement on the economic analysis that underlies the Commission's work necessarily has focused the agency's attention on these core issues and created an environment where economics is more regularly and rigorously incorporated into enforcement decisions. We think that this clearly has been to the benefit of the agency and consumers.
As an independent and expert bureau within the FTC, the Bureau of Economics ("BE") plays a critical role in the agency's enforcement decisions. However, the role of BE is not a substitute to the presence of a professional economist Commissioner who can ensure that the Commission considers, addresses, and hopefully more often than not, fully incorporates modern economic analysis into its decision-making at the highest level. The importance of including an economist among the Commissioners has become only more obvious in light of the recent report of the FTC Inspector General that evaluated the effectiveness of BE. There, the Inspector General discussed the organization and use of economists within the existing FTC structure and made several recommendations for areas for improvement to help optimize BE's effectiveness. Unsurprisingly, in the wake of the report, Commissioner Wright issued a statement that included his own recommendations for institutional changes that might elevate the role of BE. As anyone who has had the privilege of working at the Commission or regularly practices before it knows, the agency is dominated by it attorneys, often at the expense of BE. In such an environment, it is even more critical to have at least one economist as a member of the Commission if we truly are, as we should be, committed to making economics a prominent part of the agency's work.
Whether this important contribution by Commissioner Wright will be a lasting legacy will depend entirely on whether future presidents, together with the advice and consent of the Senate, will follow the lead of Presidents Reagan and Obama by continuing to appoint economists to the college of commissioners. Certainly, Commissioner Wright's service demonstrates its value.
A second characteristic of Commissioner Wright's tenure at the FTC is his willingness to engage frequently in the marketplace of ideas in order to advance antitrust policy. Commissioner Wright is a prolific writer and is well-known for not being shy in expressing his positions in any forum. Over the course of his tenure at the FTC, Commissioner Wright issued 16 dissents, delivered over 25 speeches, testified before Congress on three occasions, and participated in countless more symposia, roundtables, and interviews. Frequently writing in dissent or arguing for fundamental changes to antitrust policy, Commissioner Wright's opinions and speeches merit a close read by any serious practitioner. Whether it was Ardagh/Saint-Gobain (asymmetrical nature of competitive harm and efficiencies analysis at the FTC), Nielsen/Arbitron (limits of antitrust in double potential competition cases lacking economic evidence), Holcim/LaFarge (structural presumption is unsupported by modern economics), his torrent of writings that culminated in a historic statement on Section 5, or any number of his other statements or speeches, Commissioner Wright's willingness to express his views and have them debated in the public forum has contributed significantly to the development of antitrust law.
We hasten to note Justice Ginsburg's observation that powerful dissents force the majority to be more rigorous in their own analyses and ultimately produce better decisions. Donning his professor's mortar board, Commissioner Wright was not reticent about grading the decisions of the majority. The discipline this brings to the Commission's decisions should be welcomed by all. Borrowing from former Chief Justice Charles Evans Hughes, such dissents can provide a valuable critique of the prevailing conventional wisdom and discern a better path going forward.
Lastly, we would be remiss not to mention that although Commissioner Wright took an evidenced-based approach to antitrust law and policy grounded in modern economics seriously, he discharged his duties with both humility and humor. He was not one to stand on ceremony and honorifics and was often simply "Josh" to both the staff and those who appeared before the agency. He employed an open-door policy, welcoming staff to discuss and debate matters without ceremony. He made it a priority to nurture the development and careers of his advisors and interns. The simple fact is that as an academic he enjoyed serious discussion and was more than willing to consider the merits of "the other side." Indeed, Commissioner Wright found the crucible of testing the analysis fun and sought to make it fun for those on his staff.
Commissioner Wright's service on the FTC is yet another example of how the "revolving door" continues to replenish the intellectual stock of US agencies. Given that the "dismal science" does not respect national boundaries, one might wonder why economic analysis was employed both earlier and more rigorously in the United States than elsewhere. Are not there quality economists around the globe? We suggest that the "revolving door" bringing, as it does, new recruits from the academy and elsewhere fosters agency openness to new ideas. It continuously fertilizes the advancement and development of sound economic competition policy and enforcement. Not surprisingly, agencies that take from the cradle and give to the grave are less likely to benefit.
There's an old saying, "It's better to light a single bipartisan candle than to curse the darkness caused by your opponents." This might not be the way most people articulate this proverb, but in Washington D. C. anyone who, like Commissioner Joshua Wright, puts so much effort into finding, developing, and promoting bipartisan agreement is a rarity indeed.
Commissioner Wright's final accomplishment at the Commission was the agency's Section 5 Policy Statement. It had been a high priority of his for years. In light of the fact that the Commission had gone a century without issuing anything describing its central competition mission and the wide divergence of views at the Commission on the underlying issues, many of us thought his task impossible. But he succeeded! It wasn't the statement he wanted, of course, but his preferred statement was opposed by so many (including me) that agreement on a detailed document was not feasible. He nevertheless secured a compromise that perhaps will be the building block for a future, more detailed and even more useful document. By persevering and stressing the areas where the Commissioners agreed, he forged a historic bipartisan consensus.
Another example of Commissioner Wright's approach is a policy recommendation he and his frequent co-author, Judge Douglas Ginsburg, developed, wrote and are promoting together with two extraordinarily unlikely co-authors: Bert Foer, the founder and past President of the American Antitrust Institute, and me, a Director of this organization. You might wonder what the four of us possibly could agree upon?
Wright & Ginsburg sent a proposed set of recommendations to the US Sentencing Commission calling upon it to make a large number of changes involving criminal antitrust penalties. At the same time Foer & Lande recommended that the Sentencing Commission implement an almost opposite list of policy changes. In fact, the dueling recommendations agreed on only one issue: Both wanted to ban corporations convicted of price fixing from hiring their cartel's convicted employees after they were released from prison. Stressing their agreement, this unlikely quartet co-authored a piece advocating this policy option. We of course hope and believe that the politically diverse names on the recommendation will cause it to have a much greater impact than separate recommendations by either team would have had.
Because he always pushed as hard as possible for his preferred positions, he of course didn't get everything he wanted. But he persevered and in this way forged and secured whatever agreements he could. In today's Washington D.C. these candles are noteworthy accomplishments. Kudos to Commissioner Wright!
Josh became a Commissioner almost three years ago, so there are many of his writings to comment upon. Nevertheless, he is so prolific that a very good understanding of his law and economics approach may be gleaned merely by a perusal of his 2015 contributions. I will selectively focus upon a few representative examples of wisdom drawn from Josh Wright's (hereinafter JW) 2015 writings, going in reverse chronological order. (A fuller and more detailed exposition of his approach over the years would warrant a long law review article.)
Earlier this month, in commenting on the importance of granting FTC economists (housed in the FTC's Bureau of Economics (BE)) a greater public role in the framing of FTC decisions, JW honed in on the misuse of consent decrees to impose constraints on private sector behavior without hard evidence of consumer harm:
One [unfortunate] phenomenon is the so‐called "compromise recommendation," that is, a BE staff economist might recommend the FTC accept a consent decree rather than litigate or challenge a proposed merger when the underlying economic analysis reveals very little actual economic support for liability. In my experience, it is not uncommon for a BE staff analysis to convincingly demonstrate that competitive harm is possible but unlikely, but for BE staff to recommend against litigation on those grounds, but in favor of a consent order. The problem with this compromise approach is, of course, that a recommendation to enter into a consent order must also require economic evidence sufficient to give the Commission reason to believe that competitive harm is likely. . . . [What, then, is the solution?] Requiring BE to make public its economic rationale for supporting or rejecting a consent decree voted out by the Commission could offer a number of benefits at little cost. First, it offers BE a public avenue to communicate its findings to the public. Second, it reinforces the independent nature of the recommendation that BE offers. Third, it breaks the agency monopoly the FTC lawyers currently enjoy in terms of framing a particular matter to the public. The internal leverage BE gains by the ability to publish such a document may increase conflict between bureaus on the margin in close cases, but it will also provide BE a greater role in the consent process and a mechanism to discipline consents that are not supported by sound economics. I believe this would go a long ways towards minimizing the "compromise" recommendation that is most problematic in matters involving consent decrees.
In various writings, JW has cautioned that the FTC should apply an "evidence-based" approach to adjudication, and not lightly presume that particular conduct is anticompetitive – including in the area of patents. JW's most recent pronouncement regarding an evidence-based approach is found in his July 2015 statement with fellow Commissioner Maureen Ohlhausen filed with the U.S. International Trade Commission (ITC), recommending that the ITC apply an "evidence-based" approach in deciding (on public interest grounds) whether to exclude imports that infringe "standard essential patents" (SEPs):
There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets. The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation. These are all testable implications. Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition. . . . An evidence-based approach to the public interest inquiry, i.e., one that requires proof that holdup actually occurred in a particular case, protects incentives to participate in standard setting by allowing SEP holders to seek and obtain exclusion orders when permitted by the SSO agreement at issue and in the absence of a showing of any improper use. In contrast, any proposal that would require the ITC to presume the existence of holdup and shift the burden of proof to SEP holders to show unwillingness threatens to deter participation in standard setting, particularly if an accused infringer can prove willingness simply by agreeing to be bound by terms determined by neutral adjudication.
In such matters as Cephalon (May 2015) and Cardinal Health (April 2015), JW teamed up with Commissioner Ohlhausen to caution that disgorgement of profits as an FTC remedy in competition cases should not be lightly pursued, and indeed should be subject to a policy statement that limits FTC discretion, in order to reduce costly business uncertainty and enforcement error.
JW also brought to bear decision-theoretic insights on consumer protection matters. For example, in his April 2015 dissent in Nomi Technologies, he castigated the FTC for entering into a consent decree when the evidence of consumer harm was exceedingly weak (suggesting a high probability of a false positive, in decision-theoretic terms):
The Commission's decision to issue a complaint and accept a consent order for public comment in this matter is problematic for both legal and policy reasons. Section 5(b) of the FTC Act requires us, before issuing any complaint, to establish "reason to believe that [a violation has occurred]" and that an enforcement action would "be to the interest of the public." While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint. The Commission has not met the relatively low "reason to believe" bar because its complaint does not meet the basic requirements of the Commission's 1983 Deception Policy Statement. Further, the complaint and proposed settlement risk significant harm to consumers by deterring industry participants from adopting business practices that benefit consumers.
Consistent with public choice insights, JW stated in an April 2015 speech that greater emphasis should be placed on public advocacy efforts aimed at opposing government-imposed restraints of trade, which have a greater potential for harm than purely private restraints. Thus, welfare would be enhanced by a reallocation of agency resources toward greater advocacy and less private enforcement:
[P]ublic restraints are especially pernicious for consumers and an especially worthy target for antitrust agencies. I am quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.
In March 2015 congressional testimony, JW explained his opposition to Federal Communications Commission (FCC) net neutrality regulation, honing in on the low likelihood of harm from private conduct (and thus implicitly the high risk of costly error and unwarranted regulatory costs) in this area:
Today I will discuss my belief that the FCC's newest regulation does not make sense from an economic perspective. By this I mean that the FCC's decision to regulate broadband providers as common carriers under Title II of the Communications Act of 1934 will make consumers of broadband internet service worse off, rather than better off. Central to my conclusion that the FCC's attempts to regulate so-called "net neutrality" in the broadband industry will ultimately do more harm than good for consumers is that the FCC and commentators have failed to identify a problem worthy of regulation, much less cumbersome public-utility-style regulation under Title II.
At the same time, JW's testimony also explained that in the face of hard evidence of actual consumer harm, the FTC could take – and indeed has taken on several instances – case-specific enforcement action.
Also in March 2015, in his dissent in Par Petroleum, JW further developed the theme that the FTC should not enter into a consent decree unless it has hard evidence of competitive harm – a mere theory does not suffice:
Prior to entering into a consent agreement with the merging parties, the Commission must first find reason to believe that a merger likely will substantially lessen competition under Section 7 of the Clayton Act. The fact that the Commission believes the proposed consent order is costless is not relevant to this determination. A plausible theory may be sufficient to establish the mere possibility of competitive harm, but that theory must be supported by record evidence to establish reason to believe its likelihood. Modern economic analysis supplies a variety of tools to assess rigorously the likelihood of competitive harm. These tools are particularly important where, as here, the conduct underlying the theory of harm – that is, vertical integration – is empirically established to be procompetitive more often than not. Here, to the extent those tools were used, they uncovered evidence that, consistent with the record as a whole, is insufficient to support a reason to believe the proposed transaction is likely to harm competition. Thus, I respectfully dissent and believe the Commission should close the investigation and allow the parties to complete the merger without imposing a remedy.
In a February 2015 speech on the need for greater clarity with respect to "unfair methods of competition" under Section 5 of the FTC Act, JW emphasized the problem of uncertainty generated by the FTC's failure to adequately define unfair methods of competition:
The lack of institutional commitment to a stable definition of what constitutes an "unfair method of competition" leads to two sources of problematic variation in the agency's interpretation of Section 5. One is that the agency's interpretation of the statute in different cases need not be consistent even when the individual Commissioners remain constant. Another is that as the members of the Commission change over time, so does the agency's Section 5 enforcement policy, leading to wide variations in how the Commission prosecutes "unfair methods of competition" over time. In short, the scope of the Commission's Section 5 authority today is as broad or as narrow as a majority of commissioners believes it is.
Focusing on the empirical record, JW offered a sharp critique of FTC administrative adjudication (and the value of the FTC's non-adjudicative research function) in another February 2015 speech:
The data show three things with significant implications for those important questions. The first is that, despite modest but important achievements in administrative adjudication, it can offer in its defense only a mediocre substantive record and a dubious one when it comes to process. The second is that the FTC can and does influence antitrust law and competition policy through its unique research-and-reporting function. The third is, as measured by appeal and reversal rates, generalist courts get a fairly bad wrap relative to the performance of expert agencies like the FTC.
In the same speech, JW endorsed proposed congressional reforms to the FTC's exercise of jurisdiction over mergers, embodied in the draft "Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act." Those reforms include harmonizing the FTC and Justice Department's preliminary injunction standards, and divesting the FTC of its authority to initiate and pursue administrative challenges to unconsummated mergers, thus requiring the agency to challenge those deals in federal court.
Finally, JW dissented from the FTC's publication of an FTC staff report (based on an FTC workshop) on the "Internet of Things," in light of the report's failure to impose a cost-benefit framework on the recommendations it set forth:
[T]he Commission and our staff must actually engage in a rigorous cost-benefit analysis prior to disseminating best practices or legislative recommendations, given the real world consequences for the consumers we are obligated to protect. Acknowledging in passing, as the Workshop Report does, that various courses of actions related to the Internet of Things may well have some potential costs and benefits does not come close to passing muster as cost-benefit analysis. The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff's various proposals exceed their attendant costs. Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace. This is simply not good enough; there is too much at stake for consumers as the Digital Revolution begins to transform their homes, vehicles, and other aspects of daily life. Paying lip service to the obvious fact that the various best practices and proposals discussed in the Workshop Report might have both costs and benefits, without in fact performing such an analysis, does nothing to inform the recommendations made in the Workshop Report.
To conclude, FTC Commissioner Josh Wright went beyond merely emphasizing the application of economic theory to individual FTC cases, by explaining the need to focus economic thinking on FTC policy formulation – in other words, viewing FTC administrative processes and decision-making from an economics-based, decision-theoretical perspective, with hard facts (not mere theory) a key consideration. If the FTC is to be true to its goal of advancing consumer welfare, it should fully adopt such a perspective on a going-forward basis. One may only hope that current and future FTC Commissioners will heed this teaching.
I was saddened to learn that Commissioner Joshua Wright is resigning from the Federal Trade Commission. Commissioner Wright leaves the agency with a tremendous legacy. He brought to the FTC's decision-making groundbreaking economic analysis, such as his opinion in Ardagh/St. Gobain that the government should evaluate possible merger efficiencies under a standard of proof similar to that applied to predicted anticompetitive effects. He proposed and reached across the aisle to accomplish major reforms, such as the FTC's recent clarification of its Section 5 authority to police "unfair methods of competition" (something the agency had never done in its century-long existence). And he was gracious enough to collaborate with me on several issues, such as Internet regulation.
Consumers across the country are better off for Commissioner Wright's efforts. I wish him the best as he returns to George Mason University to teach law and economics.
When I first heard that Josh had resigned from the FTC, I wondered if the news would cause a stock market sell-off. I checked later that day, and the Dow closed slightly up, plus .39 percent.
This suggests several possible explanations. One is that the stock market had already priced in Josh's departure. Another is that the stock market realizes that Josh was just one of five votes, and that his replacement would cast votes similar to Josh's. A third possible explanation is that the FTC doesn't really have a great impact on the economy.
I think all three explanations have some merit, though especially the last two. The question is how much weight to allocate among the last two explanations.
As commentators have noted, Josh brought something unusual to the FTC: sophisticated training in economics. He also brought a lot of energy and natural political talent. If anyone could get fellow commissioners to listen to economic reasoning, surely it would be Josh. Even if his replacement votes the same way Josh did, he (or she) is unlikely to match Josh in offering strong arguments grounded in economics. That is a loss for the FTC, and for antitrust enforcement generally in this administration.
One clear achievement for Josh is the FTC policy statement on Section 5. At this stage, it's too early to tell where that will lead us. One can only hope that it will constrain the FTC to stay within the parameters of rule of reason analysis. But a willful applicant of the rule of reason can spin the analysis to justify economically unsound decisions. This points to one area in which Josh will be missed greatly: keeping the FTC honest in its application of rule of reason analysis.
Of course, I may be self-servingly putting too much weight on the value of being educated in economics. I've often joked that on my faculty, using sophisticated economic arguments is one sure way to alienate colleagues. Maybe Josh found the same at the FTC.
And if my third suggested reason Josh's resignation did not cause a stock market sell-off, that the FTC doesn't have a big impact on the economy, is correct, then we can take a relaxed view of Josh's departure. The FTC has lost a source of good judgment and economic expertise – but hey, it may not matter much at all.
With the FTC experience under his belt, Josh will hopefully be in the running for future high-level government appointments. The Supreme Court could certainly benefit from having him on board.
Josh Wright is a tour de force. He has broken the mold for a Washington regulator — and created a new one. As a scholar, he carefully crafts his analyses of public policy. As a strategic thinker, he tackles the issues that redound to the greatest social benefit. And as a champion of competitive markets, he forcefully advances rules to encourage innovation and consumer welfare. Nearly as important as his diligence within the regulatory process, he is transparent in his objectives and takes every opportunity to enunciate his principles for action. The public knows what he is doing and why it is important.
As a sample of Commissioner Wright's dedication to improving regulatory law, I am delighted to suggest the talk he gave April 2, 2015 at Clemson University, hosted by the Information Economy Project. His title: Regulation in High-Tech Markets: Public Choice, Regulatory Capture, and the FTC. He was particularly concerned in describing the harm produced by state and local barriers blocking competitive forces with respect to emerging, disruptive innovations such as Uber and AirBnB, offering remedies available via competition policy. The talk is posted here.
Excluding the much talked about Section 5 policy statement, Commissioner Wright's tenure at the FTC was highlighted by his numerous dissents. If there is one unifying theme in those dissents it is his insistence that rigorous economic analysis be at the very core of all the Commission's decisions. This theme was perhaps most evident in his decision to dissent in the Ardaugh/Saint-Gobain and Sysco/US Foods mergers, two cases that presented interesting questions about how the Commission and courts should balance a merger's likely anticompetitive effects with its procompetitive efficiencies.
In April of 2014 the Commission announced that it had accepted a consent decree in Ardaugh/Saint-Gobain that remedied its competitive concerns related to the merger of the second and third largest firms in the market for "glass containers sold to beer and wine distributors in the United States." The majority, which consisted of Commissioners Ramirez, Ohlhausen, and Brill, argued that the merger would lead to both coordinated and unilateral anticompetitive effects in the market and further stated that "the parties put forward insufficient evidence showing that the level of synergies that could be substantiated and verified would outweigh the clear evidence of consumer harm." Commissioner Wright, who was the lone dissenter, strongly disagreed with the majority's conclusions and found that the merger's cognizable efficiencies were "up to six times greater than any likely unilateral price effect," and thus the merger should have been approved without requiring a remedy.
Commissioner Wright also used his Ardaugh dissent to discuss whether the merging parties and Commission face asymmetric burdens of proof regarding competitive effects. Specifically, Commissioner Wright asked whether the "merging parties [must] overcome a greater burden of proof on efficiencies in practice than does the FTC to satisfy its prima facie burden of establishing anticompetitive effects?" Commissioner Wright stated that the Commission has acknowledged that in theory the burdens of proof should be uniform; however, he argued that the only way the majority could have found that the Ardaugh/Saint-Gobain merger would generate almost no cognizable efficiencies is by applying asymmetric burdens. He explained that the majority's approach "embraces probabilistic prediction, estimation, presumption, and simulation of anticompetitive effects on the one hand but requires efficiencies to be proven on the other."
Commissioner Wright, who was joined by Commissioner Ohlhausen, also dissented from the Commission's decision to challenge the Sysco/US Foods merger. While the Commissioners did not issue a formal dissent because of the FTC's then pending litigation, Commissioner Wright tweeted that he had "no reason to believe the proposed Sysco/US Foods transaction violated the Clayton Act." The lack of a formal dissent makes it challenging to ascertain all of Commissioner Wright's objections, but a reading of the Commission's administrative complaint provides insight on his likely positions. For example, Commissioner Wright undoubtedly disagreed with the complaint's treatment the parties' proffered efficiencies:
Extraordinary Merger-specific efficiencies are necessary to outweigh the Merger's likely significant harm to competition in the relevant markets. Respondents cannot demonstrate cognizable efficiencies that would be sufficient to rebut the strong presumption and evidence that the Merger likely would substantially lessen competition in the relevant markets.
Commissioner Wright's Ardaugh dissent makes it clear that he does not believe that the balancing of anticompetitive effects and efficiencies should be an afterthought to the agency's merger analysis, which is how the majority's complaint appears to treat it. This case likely represents another instance where Commissioner Wright believed that the majority of commissioners applied asymmetric burdens of proof when balancing the merger's competitive effects.
Commissioner Wright is not the first person to ask whether current merger analysis favors anticompetitive effects over efficiencies; however, that does not detract from the question's importance. His views reflect a belief shared by others that antitrust policy should be based on an aggregate welfare standard, rather than the consumer welfare standard that the agencies and the courts have for the most applied over the past few decades. In Commissioner Wright's view, by applying asymmetric burdens–which is functionally the same as discounting efficiencies–antitrust agencies could harm both total welfare and consumers by increasing the chance that a procompetitive merger might be blocked. It stands in contrast to the majority view that a merger that raises prices requires efficiencies, specific to the merger, of a magnitude sufficient to defeat any increase in consumer prices–and that, because the efficiency information is in the hands of the proponents, shifting the burden to them is appropriate.
While his tenure at the FTC has come to an end, expect to continue to see Commissioner Wright at the front and center of this and many other important antitrust issues.
A recent story in the Wall Street Journal described Josh Wright as the "FTC's most conservative commissioner." It is a sign of today's politicized environment that this label is used as a substitute for serious substantive analysis of the particular positions that Wright has taken relative to the other commissioners. The article also noted that he was the Republican commissioner who brokered a deal with the three democratic members to publish a short set of guidelines to deal with the Delphic question of what counts as unlawful methods of competition. Before I had received knowledge that Josh was about to resign, I had posted a piece on Defining Ideas that carried with it the near-oxymoronic title, "When Bureaucrats Do Good."
I must confess that my initial impression on hearing of the publication of the statement was that it would be more bad news. But I happily I changed course after reading the statement, which is mercifully short, and after having the benefit of the thoughtful dissent of the other Republican Commissioner Maureen Ohlhausen, and of the speech that FTC Chairwoman Edith Ramirez gave in defense of those guidelines at the George Washington Law School.
There are clearly times when short should be regarded as sweet, and this is one of them. It may well be that there is an iron law that says the longer the document that any government prepares, the worse its content. This short policy statement sets matters in the right direction when it treats unfair methods of competition as a variation on the basic theme of monopoly, and notes that where the antitrust laws do apply, the FTC should be reluctant to exercise its standalone jurisdiction. It is a tribute to Ramirez and Wright that they could come to agree on the statement, so that a set of sound principles has bipartisan support.
It is also welcome that the dissent of Commissioner Ohlhausen does not differ on fundamental orientation but on two questions that I regard as having subordinate importance: do we give public hearings before publishing the statement; and do we provide more illustrations as to how the principle out to be applied. The pressure therefore came from the pro-market side of the political spectrum such that there is now no Commissioner on the FTC who regards Section 5 of the Federal Trade Commission Act as a general warrant to pursue any and all forms of professional mischief.
The contrast of this document with the FCC's net neutrality principles is too clear to require much comment.
At this point, Josh will return to his position at George Mason University Law School, where he shall resume his distinguished academic career. He regards the publication of this one page statement as the capstone of his career. On that point, I am confident that history will prove him right. Welcome back to the Academy, and thanks for a job well done on the Commission.
Monday's posts will commence with contributions from
— with many more to come!
The case was filed in federal court by Harvey Dillenburg (a pork producer) and two organizations whose members include pork producers against the National Pork Board, claiming that it misappropriated millions of dollars from a fund for pork promotion into which all pork producers are required by law to contribute for the benefit of a trade association that is funded and controlled by large pork producers. The district court dismissed the case for lack of standing, but that decision has now been reversed by the D.C. Circuit. It is to be hoped that upon remand, the district court will take the next step and slaughter the Pork Order, thereby "bringing home the economic liberties bacon." Such an outcome would strike at the abuse of governmental processes by well-organized, powerful businesses, one of the worst aspects of crony capitalism.
The D.C. Circuit's summary description of the case is instructive:
"The National Pork Board [Board] is a quasi-governmental entity responsible for administering a federal regulatory scheme known as the 'Pork Order[,]' [which implements] . . . the Pork Act, . . . the purpose of which is to promote pork in the marketplace. . . . The Board strengthens, maintains, develops, and expands markets for pork and pork products through research and consumer information campaigns. In exchange for the Board's efforts on behalf of their industry, pork producers pay the Board a special assessment on each hog they import or sell. . . .
In 2006, the Board, with the approval of the Secretary of the Department of Agriculture, bought four trademarks associated with the slogan Pork: The Other White Meat . . . from the National Pork Producers Council [Council], an industry trade group, for $60 million. [Footnote deleted which explains that the USDA Secretary is charged by statute with reviewing the Pork Board's actions, but that the reviewing court attributes those actions to the Board.] The payment terms provide that the Board will pay the Council $3 million annually for twenty years. The Board can terminate the payments at any time with one year's notice, in which case ownership of the phrase reverts back to the Council. Five years after buying the mark, the Board replaced it with a new motto, Pork: Be Inspired. Now the Board keeps the initial slogan around as a "heritage brand" that it does not feature in its advertising.
The plaintiffs claim that the Board did not buy the slogan for its value as a marketing tool. They allege that the Board used the purchase of the slogan as a means to cut a sweetheart deal with the Council to keep the Council in business and support its lobbying efforts. They maintain that the Board overpaid for the slogan and that the Board's shift to the Pork: Be Inspired campaign makes the initial slogan all but worthless. According to the plaintiffs, the purchase of the mark and continued payment for it was and is arbitrary and capricious. The plaintiffs also argue that the Board's purchase of the slogan with the purpose of supporting the Council's lobbying efforts violates the Pork Act and Order's prohibitions against the Board spending funds to influence legislation.
The plaintiffs sued the Secretary of the Department of Agriculture under the Administrative Procedure Act seeking an order enjoining the Board's further payments to the Council and directing the Secretary to claw back what payments he can from the deal. The district court dismissed the plaintiffs' suit for lack of Article III standing. . . . The court held that Dillenburg failed to establish an injury in fact fairly traceable to the Board's actions that is likely to be redressed by a favorable decision. . . . It also held that the two plaintiff organizations could not establish standing to sue in their own right or on behalf of their pork-producing members. . . .
[W]e reverse and remand [to the district court]. This case involves a concrete and particularized harm caused by an agency's failure to confer a direct economic benefit on a statutory beneficiary. We also reject the government's argument that the plaintiffs have failed to exhaust their administrative remedies. The statute's provision for administrative review would not offer the plaintiffs adequate relief, and therefore they were not required to pursue it."
This case is an example of rent-seeking in action, and, in particular, the abuse of regulatory processes to impose disproportionate costs on less-connected rivals (a phenomenon well-documented in public choice analysis of regulation), as further revealed in the D.C. Circuit's opinion. The Council, as a private trade organization, could not require all pork producers to join it and pay dues to support institutional advertising and other pork-related promotional activities. The Council, however, achieved its goal indirectly by establishing and manipulating government regulation. It successfully lobbied for passage of the Pork Act, proposed the text that ultimately served as foundation for the Pork Order, and used the Board to exercise regulatory authority over all pork producers. Part of that exercise of regulatory authority involved the Board's agreement to pay the Council $60 million for "The Other White Meat" mark. This fee inevitably would be passed on to all pork industry members (including those that were not members of the Council), which are required by force of law to render payments to the Board.
The Board's regulatory capture by the Council (the "big industry members'" lobby) is apparent, as further revealed in the Court's opinion:
"Even though the Board paid for the mark's development, the Council registered the mark in its own name and as its sole owner. . . The Board and the Council were so enmeshed that, in 1986 when the Board voted to adopt the campaign [to promote the Other White Meat mark] and so committed itself to spend tens of millions of dollars in assessment funds over two decades on the promotion, it did not execute any licensing agreement or fee contract to formalize that arrangement. . . . [USDA's] Office of Inspector General concluded in a 1999 audit that the Board 'had relinquished too much authority to its primary contractor, the [Council], and ha[d] placed the [Council] in a position to exert undue influence over Board budgets and grant proposals.' That history . . . raises a plausible inference that the Board's purchase was not the product of arm's length negotiation.
[Moreover], [b]efore the Board entered the . . . [subsequent formal] licensing agreement [for the Other White Meat mark], the Board's own economist recommended that the Board pay no more than $375,000 annually to license the mark. . . . [Furthermore], facts plausibly show[] that, whatever its value when the Board purchased it, the [Other White Meat] mark is no longer worth $3 million per year."
A more compelling judicial account of the manipulation of government authority to achieve the aims of an organized private lobbying group (namely, using government to foist its promotional and licensing costs on the less-well-connected rivals of the lobbying organization's members) is hard to imagine.
In conclusion, while the Pork Order in and of itself may have only limited economic impact, it is symptomatic of the more general problem of rent-seeking-induced special interest regulation (both federal and state) that, collectively, imposes enormous costs on the American economy. It is also emblematic of the existence of countless federal government programs for which there is no principled justification in our republic, based on a federal Constitution that establishes limited enumerated powers and focuses on restricting government incursions into individual liberties. It is to be hoped that the federal courts will keep this in mind and use their full panoply of constitutional tools in empowering private parties to fight cronyist governmental programs.
In May 2010, Cross Match Technologies, Inc. ("Cross Match") filed a complaint with the ITC, alleging infringement of four patents it owned that involved certain fingerprint scanning devices. The ITC found the scanners were manufactured abroad by a Korean company, Suprema, Inc. ("Suprema"). An American company, Mentalix, Inc., bought the scanners and imported them into the United States. Mentalix subsequently combined the scanners with Mentalix software, and used and sold the scanners in the U.S. The ITC determined that Mentalix directly infringed a Cross Match patent claim by integrating its software with the Suprema scanners. The ITC also found that Suprema was liable for inducing patent infringement by Mentalix, in that it "willfully blinded" itself to and "actively encouraged" Mentalix's infringing U.S. activities. (Furthermore, Suprema "aided and abetted" Mentalix's infringement by assisting Mentalix in getting Mentalix software to work with the scanners.) Consequently, the ITC imposed an exclusion order covering the importation of scanners used in the infringement, applying Section 337 of the Tariff Act of 1930 ("Section 337"), which declares unlawful "importing articles that . . . infringe a valid and enforceable United States patent." On appeal, a three-judge Federal Circuit panel disagreed and found no Section 337 violation, reasoning that there are no "articles that infringe" at the time of importation when direct infringement does not occur until after importation. The Federal Circuit granted a rehearing en banc and a six-judge majority vacated the panel decision, with four judges dissenting.
The en banc majority opinion, authored by Judge Jimmie V. Reyna, applied Chevron deference to the ITC's determination. (The administrative law principle known as "Chevron deference," enunciated in 1984 by the U.S. Supreme Court in Chevron U.S.A. Inc. v. NRDC, gives judicial deference to an agency's construction of federal statutory language if (1) the statutory language is ambiguous and (2) the agency's interpretation is based on a "permissible" construction of the language. An agency's interpretation need not be the "best" or "most likely" statutory construction, it need only be "not unreasonable.") The opinion found first that because Section 337 refers to "articles that infringe," not just to infringement (the subject of the Patent Act), textual uncertainty is introduced. In other words, applying Chevron Step One, "Congress has not directly answered whether goods qualify as 'articles that infringe' when the [ITC] has found that an importer used such goods, after importation, to directly infringe at the inducement of the goods' seller." Applying Chevron Step Two, Judge Reyna deemed reasonable the ITC's determination that induced infringement was covered by Section 337: "Induced infringement is one kind of infringement, and when it is accomplished by supplying an article, the article supplied can be an 'article that infringes' if the other requirements of inducement are met." Furthermore, "[t]he legislative history consistently evidence[d] Congressional intent to vest the ITC with broad enforcement authority to remedy unfair trade acts." Accordingly, Judge Reyna held that deference to the ITC's interpretation of Section 337 was warranted.
A four-judge dissent, authored by Judge Kathleen M. O'Malley, found no ambiguity in the term "articles that infringe," and stressed that "there is no actual harm to a patentee until an infringing use, and that harm only occurs after importation for method claims such as the ones at issue in this appeal. This is especially true for staple goods like Suprema's scanners, where a broad assertion of the Commission's power could prevent noninfringing goods from entering the country on the basis of what a customer may do with that item once it enters U.S. territory. Such considerations are the purview of the district courts, and fall outside the limited statutory jurisdiction of the [ITC]." Notably, Judge O'Malley also relied heavily on the Supreme Court's 2014 decision in Limelight Networks v. Akamai Technologies, when the Court held that inducement liability may arise if and only if there is direct patent infringement. As Judge O'Malley explained, "[b]y permitting indirect infringement liability at the point of importation when there has been no direct infringement, the [Federal Circuit en banc] majority crafts patent policy where it believes there is a loophole ripe for abuse." But "[a]s the Supreme Court recently reminded us" in Limelight, " '[t]he courts should not create liability for inducement of non-infringing conduct where Congress has elected not to extend that concept.' "
The dissent has the better case. The fact is, the scanners did not infringe when they were imported, only when they were bundled subsequently with another company's software in connection with their being marketed in the United States. Finding ambiguity in the term "articles that infringe" involves an exercise in statutory construction that appears strained to the point of unreasonableness. It would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference (see, for example, the Court's very recent summary rejection of such deference in Michigan v. EPA). Furthermore, the en banc majority's willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of Akamai. Finally, Federal Circuit decisions have fared poorly before the Supreme Court in recent years, and Judge O'Malley's thoughtful application of Akamai's teachings makes the en banc majority's opinion a particularly ripe target for Supreme Court reversal, should certiorari be granted.
As Judge O'Malley pointed out, if U.S. patentees are being seriously harmed by induced infringement after the point of importation, a simple statutory tweak to Section 337 should deal with the problem. Supporters of strong patent protection would be well advised to have such an amendment "in their back pocket" and ready to go should the Supreme Court elect to review the Suprema decision.
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:
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.
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.
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.
A few key points from ICLE's brief follow, but you can read a longer summary of the brief here.
If the 2010 Order was a limited incursion into neighboring territory, the 2015 Order represents the outright colonization of a foreign land, extending FCC control over the Internet far beyond what the Telecommunications Act authorizes.
The Commission asserts vast powers — powers that Congress never gave it — not just over broadband but also over the very 'edge' providers it claims to be protecting. The court should be very skeptical of the FCC's claims to pervasive powers over the Internet.
In the 2015 Order, the FCC Invoked Title II, admitted that it was unworkable for the Internet, and then tried to 'tailor' the statute to avoid its worst excesses.
That the FCC felt the need for such sweeping forbearance should have indicated to it that it had 'taken an interpretive wrong turn' in understanding the statute Congress gave it. Last year, the Supreme Court blocked a similar attempt by the EPA to 'modernize' old legislation in a way that gave it expansive new powers. In its landmark UARG decision, the Court made clear that it won't allow regulatory agencies to rewrite legislation in an effort to retrofit their statutes to their preferred regulatory regimes.
Internet regulation is a question of 'vast economic and political significance,' yet the FCC didn't even bother to weigh the costs and benefits of its rule.
FCC Chairman Tom Wheeler never misses an opportunity to talk about the the Internet as 'the most important network known to Man.' So why did he and the previous FCC Chairman ignore requests from other commissioners for serious, independent economic analysis of the supposed problem and the best way to address it? Why did the FCC rush to adopt a plan that had the effect of blocking the Federal Trade Commission from applying its consumer protection laws to the Internet? For all the FCC's talk about protecting consumers, it appears that its real agenda may be simply expanding its own power.
Joining ICLE on the brief are:
Read the brief here, and the summary here.
Read more of ICLE's work on net neutrality and Title II, including:
Imports and Dumping
Imported goods and services provide great benefits to the American economy and to American consumers. Imports contribute to U.S. job creation on a large scale, provide key components incorporated by U.S. manufacturers into their products, and substantially raise the purchasing power of American consumers.
Despite the benefits of imports, well-organized domestic industries have long sought to protect themselves from import competition by convincing governments to impose import restrictions that raise the costs of imported goods and thus reduce the demand for imports. One of the best known types of import restrictions (one that is allowed under international trade agreements and employed by many other countries as well) is an "antidumping duty," a special tariff assessed on imported goods that allegedly are set at "unfairly lower" rates than the prices for the same products sold in their domestic market.
Product-specific U.S. antidumping investigations are undertaken by the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (USITC, an independent federal agency), in response to a petition from a U.S. producer, a group of U.S. producers, or a U.S. labor union. The DOC determines if dumping has occurred and calculates the "dumping margin" (the difference between a "fair" and an "unfair" price) for the setting of antidumping tariffs. The USITC decides whether a domestic industry has been "materially injured" by dumping. If the USITC finds material injury, the DOC publishes an antidumping order, which requires importers of the investigated merchandise to post a cash deposit equal to the estimated dumping duty margins.
Economists define dumping as international "price discrimination"— the charging of lower prices (net of selling expenses and transportation) in a foreign market than in a domestic market for the same product. Despite its bad-sounding label, price discrimination, whether foreign or domestic, is typically a perfectly legitimate profitable business practice that benefits many consumers. Price discrimination allows a producer to sell to additional numbers of price-sensitive consumers in the low-priced market, to their benefit: Those consumers would have bought nothing at all if faced with a uniformly applied higher price.
Dumping harms domestic consumers and the overall economy only when the foreign seller successfully drives domestic producers out of business by charging an overly low "predatory" (below its cost) import price, monopolizes the domestic market, and then raises import prices to monopoly levels, thereby recouping any earlier losses. In such a situation, domestic consumers pay higher prices over time due to the domestic monopoly, and domestic producers that exited the market due to predation suffer welfare losses as well.
The Problem with Current U.S. Antidumping Law
Although antidumping law originally was aimed at counteracting such predation, antidumping provisions long ago were reformulated to raise the likelihood that dumping would be found in matters under investigation. In particular, 1974 legislation eliminated consideration of sales made below full production cost in the home market and promoted the use of "constructed value" calculations for home-market sales that included approximations for the cost of production, selling, general and administrative expenses, and an amount for profit. This methodology, compared to the traditional approach of comparing actual net foreign product prices with net U.S. prices, tended to favor domestic producers by yielding higher margins of dumping.
The favoring of domestic industries continued with the Trade Tariff Act of 1984, which compelled the USITC to use a "cumulation" analysis that could subject multiple countries to anti-dumping penalties if one county's product was found to cause material injury to the establishment of a domestic industry. More specifically, under cumulation, if multiple countries are being investigated for dumping the same particular product and if exports from any one of those countries, or all in combination, are found to cause material injury, then all exports are made subject to an antidumping order. Thus, imports from individual countries that individually could not be shown to cause material injury face a price increase — an anti–American consumer outcome that lacks any legitimate rationale.
These and other developments have further encouraged American industries to invoke antidumping as a protectionist mechanism. Thus, it is not surprising that in recent decades, there has been a significant increase in the number of U.S. antidumping cases filed and the number of affirmative injury findings. Also noteworthy is the proliferation of foreign antidumping laws since 1980, which harms American exporters. Overall, the economic impact of antidumping law on the American economy has grown substantially. In short, antidumping is a cronyist special interest law that harms American consumers.
Moreover, even taking into account domestic industrial interests, prohibiting dumping likely would not have a positive effect on domestic industry as a whole. Antidumping restrictions on imported raw materials and industrial products used by U.S. firms make it difficult for these firms to compete internationally. In fact, the USITC is statutorily barred from considering their impact on consuming industries. These consuming industries are often a larger part of the U.S. economy than the industries benefitting from antidumping regulation, and producers of upstream products have become reliant on restricting customer access to foreign goods rather than better responding to their customers' needs.
Furthermore, antidumping harms the U.S. economy by reducing American firms' incentive to produce more efficiently. Non-predatory dumping spurs domestic firms to produce more efficiently (at lower costs) so that they can reduce prices and compete with imports in order to remain in the market. Finally, the existence of antidumping law may encourage implicit collusion among domestic firms and foreign firms to soften price competition. The truth is that when domestic industries complain that non-predatory dumping is "unfair," they are really objecting to competition on the merits — competition that raises overall long-term American economic welfare.
A New Antitrust-Based Predatory Pricing Test for Dumping
In sum, aggressive price competition by foreign producers benefits American consumers, enhances economic efficiency, and promotes competitive vigor — net benefits to the American economy. Only below-cost "predatory dumping" by a foreign monopolist that allows it to drive out American producers and then charge monopoly prices to American consumers should be a source of U.S. policy concern and legal prohibition.
A test that would prohibit only harmful predatory dumping can be drawn directly from a standard developed by U.S. courts and scholars for determining illegal price predation under American antitrust law. Applying that test in antidumping cases, antidumping tariffs would be imposed only when two conditions were satisfied.
First, the government would have to determine that the imports under scrutiny were priced at a below-cost level that caused the foreign producer to incur losses on the production and sale of those imports. This would be a price below "average avoidable cost," which would include all the costs that a firm could have avoided incurring by not producing the allegedly dumped products.
Second, if it met the first test, the government would have to show that the firm allegedly doing the dumping would be likely to "recoup" — that is, charge high monopoly prices for future imports that more than make up for its current losses on below cost imports.
This proposed new antidumping methodology would be administrable. Indeed, because it focuses narrowly and solely on certain readily ascertainable costs and data on domestic industry viability, it should be easier (and thus less costly) to apply than the broad and uncertain methodologies under current law.
Of perhaps greater significance, it could serve as a sign that the U.S. government favors competition on the merits and rejects special-interest cronyism — a message that could prove valuable in international negotiations aimed at having other nations' antidumping regimes adopt a similar approach. To the extent that other jurisdictions adopted reforms that emulated the new American approach, U.S. exporters would benefit from reduced barriers to trade, a further boon to the U.S. economy.
U.S. antidumping law should be reformed so that it is subject to a predatory pricing test drawn from American antitrust law. Application of such a standard would strengthen the American economy and benefit U.S. consumers while precluding any truly predatory dumping designed to destroy domestic industries and monopolize American industrial sectors.
The key role of tackling ACMDs in spurring economic growth is highlighted by the highly publicized Greek economic crisis. The Heritage Foundation recently assessed the issues of fiscal profligacy and over-taxation that need to be addressed by Greece. While those issues are of central importance, Greece will not be able to fulfill its economic potential without also undertaking substantial regulatory reforms and eliminating ACMDs. In that regard, a 2014 OECD report on competition-distorting rules and provisions in Greece, concluded that the elimination of barriers to competition would lead to increased productivity, stronger economic growth, and job creation. That report, which focused on regulatory restrictions in just four sectors of the Greek economy (food processing, retail trade, building materials, and tourism), made 329 specific recommendations to mitigate harm to competition. It estimated that the benefit to the Greek economy of implementing those reforms would be around EUR 5.2 billion – the equivalent of 2.5% of GDP – due to increased purchasing power for consumers and efficiency gains for companies. It also stressed that implementing those recommendations would have an even wider impact over time. Extended to all other sectors of the Greek economy (which are also plagued by overregulation and competitive distortions), the welfare gains from Greek regulatory reforms would be far larger. The OECD's Competition Assessment Toolkit provides a useful framework that Greece and other reform-minded nations could use to identify harmful regulatory restrictions.
Unfortunately, in Greece and elsewhere, merely identifying the sources of bad regulation is not enough – political will is needed to actually dismantle harmful regulatory barriers and cronyist rules. As Shanker Singham pointed out yesterday in commenting on the prospects for Greek regulatory reform, "[t]here is enormous wealth locked away in the Greek economy, just as there is in every country, but distortions destroy it. The Greek competition agency has done excellent work in promoting a more competitive market, but its political masters merely pay lip service to the concept. . . . The Greeks have offered promises of reform, but very little acceptance of the major structural changes that are needed." The United States is not immune to this problem – consider the case of the Export-Import Bank, whose inefficient credit distortionary policies proved impervious to reform, as the Heritage Foundation explained.
What, then, can be done to reduce the burden of overregulation and ACMDs, in Greece, the United States, and other countries? Consistent with Justice Louis Brandeis's observation that "sunshine is the best disinfectant," shining a public spotlight on the problem can, over time, help build public support for dismantling or reforming welfare-inimical restrictions. In that regard, the Heritage Foundation's Index of Economic Freedom takes into account "regulatory efficiency," and, in particular, "the overall burden of regulation as well as the efficiency of government in the regulatory process", in producing annual ordinal rankings of every nations' degree of economic freedom. Public concern has to translate into action to be effective, of course, and thus the Heritage Foundation has promulgated a list of legislative reforms that could help rein in federal regulatory excesses. Although there is no "silver bullet," the Heritage Foundation will continue to publicize regulatory overreach and ACMDs, and propose practical solutions to dismantle these harmful distortions. This is a long-term fight (incentives for government to overregulate and engage in cronyism are not easily curbed), but well worth the candle.
Before explaining why Wright is right on this one, some quick background on the GUPPI. In 2010, the DOJ and FTC revised their Horizontal Merger Guidelines to reflect better the actual practices the agencies follow in conducting pre-merger investigations. Perhaps the most notable new emphasis in the revised guidelines was a move away from market definition, the traditional starting point for merger analysis, and toward consideration of potentially adverse "unilateral" effects—i.e., anticompetitive harms that, unlike collusion or even non-collusive oligopolistic pricing, need not involve participation of any non-merging firms in the market. The primary unilateral effect emphasized by the new guidelines is that the merger may put "upward pricing pressure" on brand-differentiated but otherwise similar products sold by the merging firms. The guidelines maintain that when upward pricing pressure seems significant, it may be unnecessary to define the relevant market before concluding that an anticompetitive effect is likely.
The logic of upward pricing pressure is straightforward. Suppose five firms sell competing products (Products A-E) that, while largely substitutable, are differentiated by brand. Given the brand differentiation, some of the products are closer substitutes than others. If the closest substitute to Product A is Product B and vice-versa, then a merger between Producer A and Producer B may result in higher prices even if the remaining producers (C, D, and E) neither raise their prices nor reduce their output. The merged firm will know that if it raises the price of Product A, most of the lost sales will be diverted to Product B, which that firm also produces. Similarly, sales diverted from Product B will largely flow to Product A. Thus, the merged company, seeking to maximize its profits, may face pressure to raise the prices of Products A and/or B.
The GUPPI seeks to assess the likelihood, absent countervailing efficiencies, that the merged firm (e.g., Producer A combined with Producer B) would raise the price of one of its competing products (e.g., Product A), causing some of the lost sales on that product to be diverted to its substitute (e.g., Product B). The GUPPI on Product A would thus consist of:
The Value of Sales Diverted to Product B
Foregone Revenues on Lost Product A Sales.
The value of sales diverted to Product B, the numerator, is equal to the number of units diverted from Product A to Product B times the profit margin (price minus marginal cost) on Product B. The foregone revenues on lost Product A sales, the denominator, is equal to the number of lost Product A sales times the price of Product A. Thus, the fraction set forth above is equal to:
Number of A Sales Diverted to B * Unit Margin on B
Number of A Sales Lost * Price of A.
The Guidelines do not specify how high the GUPPI for a particular product must be before competitive concerns are raised, but they do suggest that at some point, the GUPPI is so small that adverse unilateral effects are unlikely. ("If the value of diverted sales is proportionately small, significant unilateral price effects are unlikely.") Consistent with this observation, DOJ's Antitrust Division has concluded that a GUPPI of less than 5% will not give rise to a merger challenge.
Commissioner Wright has split with his fellow commissioners over whether the FTC should similarly adopt a safe harbor for horizontal mergers where the adverse competitive concern is unilateral effects and the GUPPIs are less than 5%. Of the 330 markets in which the Commission is requiring divestiture of stores, 27 involve GUPPIs of less than 5%. Commissioner Wright's position is that the combinations in those markets should be deemed to fall within a safe harbor. At the very least, he says, there should be some safe harbor for very small GUPPIs, even if it kicks in somewhere below the 5% level. The Commission has taken the position that there should be no safe harbor for mergers where the competitive concern is unilateral effects, no matter how low the GUPPI. Instead, the Commission majority says, GUPPI is just a starting point; once the GUPPIs are calculated, each market should be assessed in light of qualitative factors, and a gestalt-like, "all things considered" determination should be made.
The Commission majority purports to have taken this approach in the Family Dollar/Dollar Tree case. It claims that having used GUPPI to identify some markets that were presumptively troubling (markets where GUPPIs were above a certain level) and others that were presumptively not troubling (low-GUPPI markets), it went back and considered qualitative evidence for each, allowing the presumption to be rebutted where appropriate. As Commissioner Wright observes, though, the actual outcome of this purported process is curious: almost none of the "presumptively anticompetitive" markets were cleared based on qualitative evidence, whereas 27 of the "presumptively competitive" markets were slated for a divestiture despite the low GUPPI. In practice, the Commission seems to be using high GUPPIs to condemn unilateral effects mergers, while not allowing low GUPPIs to acquit them. Wright, by contrast, contends that a low-enough GUPPI should be sufficient to acquit a merger where the only plausible competitive concern is adverse unilateral effects.
He's right on this, for at least five reasons.
One final point. It is important to note that Commissioner Wright is not saying—and would be wrong to say—that a high GUPPI should be sufficient to condemn a merger. The GUPPI has never been empirically verified as a means of identifying anticompetitive mergers. As Dennis Carlton observed, "[T]he use of UPP as a merger screen is untested; to my knowledge, there has been no empirical analysis that has been performed to validate its predictive value in assessing the competitive effects of mergers." Dennis W. Carlton, Revising the Horizontal Merger Guidelines, 10 J. Competition L. & Econ. 1, 24 (2010). This dearth of empirical evidence seems especially problematic in light of the enforcement agencies' spotty track record in predicting the effects of mergers. Craig Peters, for example, found that the agencies' merger simulations produced wildly inaccurate predictions about the price effects of airline mergers. See Craig Peters, Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry, 49 J.L. & Econ. 627 (2006). Professor Carlton thus warns (Carlton, supra, at 32):
UPP is effectively a simplified version of merger simulation. As such, Peters's findings tell a cautionary tale—more such studies should be conducted before one treats UPP, or any other potential merger review method, as a consistently reliable methodology by which to identify anticompetitive mergers.
The Commission majority claims to agree that a high GUPPI alone should be insufficient to condemn a merger. But the actual outcome of the analysis in the case at hand—i.e., finding almost all combinations involving high GUPPIs to be anticompetitive, while deeming the procompetitive presumption to be rebutted in 27 low-GUPPI cases—suggests that the Commission is really allowing high GUPPIs to "prove" that anticompetitive harm is likely.
The point of dispute between Wright and the other commissioners, though, is about how to handle low GUPPIs. On that question, the Commission should either join the DOJ in recognizing a safe harbor for low-GUPPI mergers or play it straight with the public and delete the Horizontal Merger Guidelines' observation that "[i]f the value of diverted sales is proportionately small, significant unilateral price effects are unlikely." The better approach would be to affirm the Guidelines and recognize a safe harbor.
Readers looking for background on the case (as well as my own views — decidedly in opposition to those of the DOJ) can find my previous commentary on the case and some of the issues involved here:
Other TOTM authors have also weighed in. See, e.g.:
Federal Civil Enforcement Committee, Joint Conduct, Unilateral Conduct, and Media & Tech Committees Present:
July 16, 2015
12:00 noon to 1:30 pm Eastern / 9:00 am to 10:30 am Pacific
On June 30, the Second Circuit affirmed DOJ's trial victory over Apple in the Ebooks Case. The three-judge panel fractured in an interesting way: two judges affirmed the finding that Apple's role in a "hub and spokes" conspiracy was unlawful per se; one judge also would have found a rule-of-reason violation; and the dissent — stating Apple had a "vertical" position and was challenging the leading seller's "monopoly" — would have found no liability at all. What is the reasoning and precedent of the decision? Is "marketplace vigilantism" (the concurring judge's phrase) ever justified? Our panel — which includes the former DOJ head of litigation involved in the case — will debate the issues.
Register HERE
Essentially, claim one is based on the notion that Uber informs passengers that gratuity is included in the total cost of the car service and that there is no need to tip the driver. However, according to the plaintiffs, Uber either failed to collect this gratuity, or by failing to differentiate between the gratuity and the fee for the ride, and then collecting its own 20% cut of the total fee, the company improperly retained some of the gratuity for itself. In truth, it's not completely clear from the complaint exactly how the plaintiffs are calculating allegedly withheld tips. Uber does a good job in its motion to defeat certification of pointing out, on the one hand, that there is no such thing as a "standard tip," and, on the other hand, that the assessment of the tip issue would require so much individualized examination — from figuring out whether drivers were told that they could be tipped or not, to figuring out if drivers actually were consistently tipped — that the common issues proper to class examination would be overwhelmed.
The real meat of this case, however, and the issue with the most effect on both Uber's bottom line as well as on the future of sharing platforms generally, is whether the drivers should be classified as employees or not.
Uber's motion to defeat certification is, logically enough, based on attacking the commonality and typicality requirements of Rule 23. The main thrust of Uber's motion is that not only would the four named plaintiffs be inappropriate to represent the 160,000 member class of allegedly harmed drivers, but also no such plaintiffs could represent such a class as the relationship between Uber and its drivers is so diverse that no common questions or issues would control the proceeding. In support of its position, Uber introduced the sworn declarations of over 400 Uber drivers from California, each detailing a unique situation that would either make them not in line with the harms alleged by the named plaintiffs, or squarely opposed to them.
Further, there were seventeen different contracts involved in the relationship between Uber and the 160,000 drivers swept up into the suit, which would make identifying common questions exceedingly difficult. Even terms that are common across agreements, Uber claims, would have enough distinction between them to make class certification impossible. For instance, Uber cited numerous examples from its different agreements where tipping was permitted, and others where it was not mentioned at all. Similarly, Uber cited examples where the right to terminate rested solely with Uber, and others where the right to terminate was by mutual consent between Uber and the driver. Further, Uber claims that the employment test from Borello (the case that governs employee classification in California) requires a fact-based examination of each driver's particular circumstances owing to the wide variation in contract terms — further making class certification inappropriate.
Uber's arguments are all sound, and I sincerely hope that it defeats the class certification. But the case itself represents an ongoing and persistent problem for Uber and sharing economy platforms across the United States (and the world, really). The core of that problem is simply this: are you an employee or a contractor? A heading from Uber's motion stands out to me as emblematic of this problem:
The Named Plaintiffs Are Not Typical Of the Putative Class Because There Is No Typical Uber Driver
There is no typical Uber driver because Uber is just a platform, the definitions of our antiquated legal system notwithstanding. The real value proposition of sharing platforms is that they enable normal folks — that is, people outside of a typically defined industry — to take part in an industry that was previously dominated by firms (and replete with considerable barriers to entry). As the Northern District of California observes in Cotter v. Lyft, trying to fit a sharing economy worker of today into yesterday's notion of "employees" and "contractors" is akin to "be[ing] handed a square peg and asked to choose between two round holes." In the same passage, that court observed that "[t]he test the California courts have developed over the 20th Century for classifying workers isn't very helpful in addressing this 21st Century problem."
The claims of the plaintiffs in the Uber class action notwithstanding, there is nothing inherently "employee"-like about an Uber driver, and there are plenty of opportunities for sharing economy workers to not be quite so "contractor"-like either. What we really need is some creative thinking, and an application of legal principles (as opposed to tired categories) to the new reality of the 21st century in order to come up with a third way (and maybe a fourth and fifth way, as well…) of regulating labor relationships. If we must have classes, consider it the entrepreneurial class.
Uber's business model is a great example of how an employee definition doesn't quite make sense. The party that contracts with Uber might not even be an individual, but a corporation that, even without Uber's platform, would be providing private ride services. Particularly with UberBlack, private companies use Uber's lead generation platform merely to supplement their own marketing efforts. Obviously converting these companies and their own employees into "employees" of Uber is ludicrous.
However, even for the more common example that many people will first think of — the guy down the street with a car and some time on his hands — sticking him into the employee category may or may not make sense. First, as an employee he will be handed a whole raft of potential benefits that have corresponding obligations for Uber. Those obligations — like disability, health benefits, time off, etc — will come at a cost, which will typically mean less money earned for that sometimes-driver as those costs are passed on in the form of either increased prices (and a reduction in ridership) or reduced wages. For many people, this will decrease their marginal earnings to the point where it won't make sense for them to drive anymore.
Second, for many people it may lead to an outright conflict that either prevents them from being a driver, or else locks them into a single platform, thus harming competition in the marketplace. A driver who is Uber's "employee" may be in violation of her duties of loyalty to Uber if she takes rides from the Lyft platform (and multi-homing is extremely common in this space). Similarly, employers – in particular state and municipal governments – frequently have strict rules on outside employment, and a determination that driving for Uber makes you an "employee" of the company may effectively preclude drivers by virtue of their actual employer's policies.
Further, I believe it's notable that many employment tests in the United States are extremely multi-factor; the Borello case from CA outlines thirteen distinct considerations, for instance. The utter complexity of fitting a worker into an "employee" classification suggests that even this old, familiar notion of what it is to be an "employee" is not quite as clear as we often presume, but is more of a "catch-all" category. The sharing-economy platforms from companies like Uber and Lyft will only exacerbate this problem — and serve to make its problematic consequences more pointed.
But even the definition of "contractor" is inapplicable to these drivers. In the case at hand, Uber was accused of treating drivers as employees because it provided suggestions about how to earn higher ratings from riders, and because it offered "on-boarding" programs that give new drivers an orientation. This general training is not a need unique to Uber, however. Consider Instacart's recent announcement that it would re-classify some of its employees in Boston as part-time workers. In large part, it seems clearly to be the case that the company decided to make this move for purely strategic, legal reasons. In actuality, it wanted simply to be able to guarantee that there would be some minimum level of quality for the people who provided services through its network. This might involve orientation meetings, intermittent trainings, and some minor direction on how a shopper should perform his or her work (for instance, pick produce last so that it remains fresh). There is no obvious reason why providing this sort of guidance should force a company to destroy all of the unique and socially beneficial qualities of its offerings by being forced into classifying on-demand workers as "employees."
The sharing economy promises to remove the transaction costs that have for quite a long time chained employees to firms. On their own, individuals simply cannot obtain enough information that would enable them to realize a fully self-defined work environment. It's an accident of history (and technology) — of scarce resources and scarcer information — that the model of work has revolved around selling one's services to an employer. But technology is now rendering this model inefficient compared to the alternatives — and our legal system should not get in its way. Canadian courts have begun experimenting with a third classification of worker — the "dependent" worker, a classification that may or may not work here — and so too should our courts and legislatures start thinking about a new classification. It makes no sense to drag down cutting-edge 21st century work and life models with depression-era notions of what it means to earn a living.
In 2009, Apple sought to enter the retail market for e-books, as it prepared to launch its first iPad tablet. Apple, however, confronted an e-book monopolist, Amazon (possessor of a 90 percent e-book market share), that was effectively excluding new entrants by offering bestsellers at a loss through its popular Kindle device ($9.99, a price below what Amazon was paying publishers for the e-book book rights). In order to effectively enter the market without incurring a loss itself (by meeting Amazon's price) or impairing its brand (by charging more than Amazon), Apple approached publishers that dealt with Amazon and offered itself as a competing e-book buyer, subject to the publishers agreeing to a new distribution model that would lower barriers to entry into retail e-book sales. The new publishing model was implemented by three sets of contract terms Apple asked the publishers to accept – agency pricing, tiered price caps, and a most-favored-nation (MFN) clause. (I refer the reader to the full panel majority opinion for a detailed discussion of these clauses.) None of those terms, standing alone, is illegal. Although the publishers were unhappy about Amazon's below-cost pricing for e-books, no one publisher alone could counter Amazon. Five of the six largest U.S. publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) agreed to Apple's terms and jointly convinced Amazon to adopt agency pricing. Apple also encouraged other publishers to implement agency pricing in their contracts with other retailers. The barrier to entry thus removed, Apple entered the retail market as a formidable competitor. Amazon's retail e-book market share fell, and today stands at 60 percent.
The U.S. Department of Justice (DOJ) and 31 states sued Apple and the five publishers for conspiring in unreasonable restraint of trade under Sherman Act § 1. The publishers settled (signing consent decrees which prohibited them for a period from restricting e-book retailers' ability to set prices), but Apple proceeded to a bench trial. A federal district court held that Apple's conduct as a vertical enabler of a horizontal price conspiracy among the publishers was a per se violation of § 1, and that (in any event) Apple's conduct would also violate § 1 under the antitrust rule of reason. A majority of the Second Circuit panel affirmed on the ground of per se liability, without having to reach the rule of reason question.
Judge Jacobs' dissent argued that Apple's conduct was not per se illegal and also passed muster under the rule of reason. He pointed to three major errors in the majority's opinion. First, the holding that the vertical enabler of a horizontal price fixing is in per se violation of the antitrust laws conflicts with the Supreme Court's teaching (in overturning the per se prohibition on resale price maintenance) that a vertical agreement designed to facilitate a horizontal cartel "would need to be held unlawful under the rule of reason." Leegin Creative Leather Prods, Inc. v. PSKS, Inc. 551 U.S. 877, 893 (2007) (emphasis added). Second, the district court failed to recognize that Apple's role as a vertical player differentiated it from the publishers – it should have considered Apple as a competitor on the distinct horizontal plane of retailers, where Apple competed with Amazon (and with smaller player such as Barnes & Noble). Third, assessed under the rule of reason, Apple's conduct was "overwhelmingly" procompetitive; Apple was a major potential competitor in a market dominated by a 90 percent monopoly, and was "justifiably unwilling" to enter a market on terms that would assure a loss on sales or exact a toll on its reputation.
Judge Jacobs' analysis is on point. The Supreme Court's wise reluctance to condemn any purely vertical contractual restraint under the per se rule reflects a sound understanding that vertical restraints have almost always been found to be procompetitive or competitively neutral. Indeed, vertical agreements that are designed to facilitate entry into an important market dominated by one firm, such as the ones at issue in the Apple case, are especially bad candidates for summary condemnation. Thus, the majority's decision to apply the per se rule to Apple's contracts appears particularly out of touch with both scholarship and marketplace realities.
More generally, as Professor Herbert Hovenkamp (the author of the leading antitrust treatise) and other scholars have emphasized, well-grounded antitrust analysis involves a certain amount of preliminary evaluation of a restraint seen in its relevant factual context, before a "per se" or "rule of reason" label is applied. (In the case of truly "naked" secret hard core cartels, which DOJ prosecutes under criminal law, the per se label may be applied immediately.) The Apple panel majority panel botched this analytic step, in failing to even consider that Apple's restraints could enhance retail competition with Amazon.
The panel majority also appeared overly fixated on the fact that some near-term e-book retail prices rose above Amazon's previous below cost levels in the wake of Apple's contracts, without noting the longer term positive implications for the competitive process of new e-book entry. Below-cost prices are not a feature of durable efficient competition, and in this case may well have been a temporary measure aimed at discouraging entry. In any event, what counts in measuring consumer welfare is not short term price, but whether expanded output is being promoted by a business arrangement – a key factor that the majority notably failed to address. (It appears highly probable that the fall in Amazon's e-book retail market share, and the invigoration of e-book competition, have generated output and welfare levels higher than those that would have prevailed had Amazon maintained its monopoly. This is bolstered by Apple's showing, which the majority does not deny, that in the two years following the "conspiracy" among Apple and the publishers, prices across the e-book market as a whole fell slightly and total output increased.)
Finally, Judge Jacobs' dissent provides strong arguments in favor of upholding Apple's conduct under the rule of reason. As the dissent stresses, removal of barriers to entry that shield a monopolist, as in this case, is in line with the procompetitive goals of antitrust law. Another procompetitive effect is the encouragement of innovation (manifested by the enablement of e-book reading with the cutting-edge functions of the iPad), a hallmark and benefit of competition. Another benefit was that the elimination of below-cost pricing helped raise authors' royalties. Furthermore, in the words of the dissent, any welfare reductions due to Apple's vertical restrictions are "no more than a slight offset to the competitive benefits that now pervade the relevant market." (Admittedly that comment is a speculative observation, but in my view very likely a well-founded one.) Finally, as the dissent points out, the district court's findings demonstrate that Apple could not have entered and competed effectively using other strategies, such as wholesale contracts involving below-cost pricing (like Amazon's) or higher prices. Summing things up, the dissent explains that "Apple took steps to compete with a monopolist and open the market to more entrants, generating only minor competitive restraints in the process. Its conduct was eminently reasonable; no one has suggested a viable alternative." In closing, even if one believes a more fulsome application of the rule of reason is called for before reaching the dissent's conclusion, the dissent does a good job in highlighting the key considerations at play here – considerations that the majority utterly failed to address.
In sum, the Second Circuit panel majority wore jurisprudential blinders in its Apple decision. Like the mesmerized audience at a magic show, it focused in blinkered fashion on a magician's sleight of hand (the one-dimensional characterization of certain uniform contractual terms), while not paying attention to what was really going on (the impressive welfare-enhancing invigoration of competition in e-book retailing). In other words, the majority decision showed a naïve preference for quick and superficial characterizations of conduct at the expense of a nuanced assessment of the broader competitive context. Perhaps the Second Circuit en banc will have the opportunity to correct the panel's erroneous understanding of per se and rule of reason analysis. Even better, the Supreme Court may wish to step in to ensure that its thoughtful development of antitrust doctrine in recent years – focused on actual effects and economic efficiency, not on superficial condemnatory labels that ignore marketplace benefits – not be undermined.
Toolkit 3 begins with a "competition checklist" that states that a competition assessment should be undertaken if a regulatory or legislative proposal has any one of four effects: (1) it limits the number or range of suppliers; (2) it limits the ability of suppliers to compete; (3) it reduces the incentive of suppliers to compete; or (4) it limits the choices and information available to consumers. The Toolkit then sets forth basic guidance on competition assessments in seven relatively short, clearly written chapters.
Chapter one begins by explaining that Toolkit 3 "shows how to assess laws, regulations, and policies for their competition effects, and how to revise regulations or policies to make them more procompetitive." To that end, the chapter introduces the concept of market studies and sectoral reviews, and outlines a six-part process for carrying out competition assessments: (1) identify policies to assess; (2) apply the competition checklist (see above); (3) identify alternative options for achieving a policy objective; (4) select the best option; (5) implement the best option; and (6) review the impacts of an option once it has been implemented.
Chapter two provides general guidance on the selection of public policies for examination, with particular attention to the identification of sectors of the economy, that have the greatest restraints on competition and a major impact on economic output and efficiency.
Chapter three focuses on competition screening through use of threshold questions embodied in the four-part competition checklist. It also provides examples of the sorts of regulations that fall into each category covered by the checklist.
Chapter four sets forth guidance for the examination of potential restrictions that have been flagged for evaluation by the checklist. It provides indicators for deciding whether or not "in-depth analysis" is required, delineates specific considerations that should be brought to bear in conducting an analysis, and provides a detailed example of the steps to be followed in assessing a hypothetical drug patent law (beginning with a preliminary assessment, followed by a detailed analysis, and ending with key findings).
Chapter five centers on identifying the policy options that allow a policymaker to achieve a desired objective with a minimum distortion of competition. It discusses: (1) identifying the purpose of a policy; (2) identifying the competition problems caused by the policy under examination and whether it is necessary to achieve the desired objective; (3) evaluating the technical features of the subject matter being regulated; (4) accounting for features of the broader regulatory environment that have an effect on the market in question, in order to develop alternatives; (5) understanding changes in the business or market environment that have occurred since the last policy implementation; and (6) identifying specific techniques that allow an objective to be achieved with a minimum distortion of competition. The chapter closes by briefly describing various policy approaches for achieving a hypothetical desired reform objective (promotion of generic drug competition).
Chapter six provides guidance on comparing the policy options that have been identified. After summarizing background concepts, it discusses qualitative analysis, quantitative analysis, and the measurement of costs and benefits. The cost-benefits section is particularly thorough, delving into data gathering, techniques of measurement, estimates of values, adjustments to values, and accounting for risk and uncertainty. These tools are then applied to a specific hypothetical involving pharmaceutical regulation, featuring an assessment of the advantages and disadvantages of alternative options.
Chapter seven outlines the steps that should be taken in submitting a recommendation for government action. Those involve: (1) selecting the best policy option; (2) presenting the recommendation to a decision-maker; (3) drafting a regulation that is needed to effectuate the desired policy option; (4) obtaining final approval; and (5) implementing the regulation. The chapter closes by applying this framework to hypothetical regulations.
Chapter 8 discusses the performance of ex post evaluations of competition assessments, in order to determine whether the option chosen following the review process had the anticipated effects and was most appropriate. Four examples of ex post evaluations are summarized.
Toolkit 3 closes with a brief annex that describes mathematically and graphically the consumer benefits that arise when moving from a restrictive market equilibrium to a competitive equilibrium.
In sum, the release of Toolkit 3 is best seen as one more small step forward in the long-term fight against state-managed regulatory capitalism and cronyism, on a par with increased attention to advocacy initiatives within the International Competition Network and growing World Bank efforts to highlight the welfare harm due to governmental regulatory impediments. Although anticompetitive government market distortions will remain a huge problem for the foreseeable future, at least international organizations are starting to acknowledge their severity and to provide conceptual tools for combatting them. Now it is up to free market proponents to work in the trenches to secure the political changes needed to bring such distortions – and their rent-seeking advocates – to heel. This is a long-term fight, but well worth the candle.
In a concurring opinion, Justice Thomas opined that this case "raises serious questions about the constitutionality of our broader practice of deferring to agency interpretations of federal statutes." Justice Elena Kagan, joined by Justices Ruth Bader Ginsburg, Stephen Breyer, and Sonya Sotomayor, dissented, reasoning that EPA "acted well within its authority in declining to consider costs at the [beginning] . . . of the regulatory process given that it would do so in every round thereafter."
Although the Supreme Court's holding merits praise, it is inherently limited in scope, and should not be expected to significantly constrain regulatory overreach, whether by the EPA or by other agencies. First, in remanding the case, the Court did not opine on the precise manner in which costs and benefits should be evaluated, potentially leaving EPA broad latitude to try to reach its desired regulatory result with a bit of "cost-benefit" wordsmithing. Such a result would not be surprising, given that "[t]he U.S. Government has a strong tendency to overregulate. More specifically, administrative agencies such as EPA, whose staffs are dominated by regulatorily-minded permanent bureaucrats, will have every incentive to skew judicially-required "cost assessments" to justify their actions – based on, for example, "false assumptions and linkages, black-box computer models, secretive collusion with activist groups, outright deception, and supposedly 'scientific' reports whose shady data and methodologies the agency refuses to share with industries, citizens or even Congress." Since, as a practical matter, appellate courts have neither the resources nor the capacity to sort out legitimate from illegitimate agency claims that regulatory programs truly meet cost-benefit standards, it would be naïve to believe that the Court's majority opinion will be able to do much to rein in the federal regulatory behemoth.
What, then, is the solution? The concern that federal administrative agencies are being allowed to arrogate to themselves inherently executive and judicial functions, a theme previously stressed by Justice Thomas, has not led other justices to call for wide-scale judicial nullification or limitation of expansive agency regulatory findings. Absent an unexpected Executive Branch epiphany, then, the best bet for reform lies primarily in congressional action.
What sort of congressional action? The Heritage Foundation has described actions needed to help stem the tide of overregulation: (1) require congressional approval of new major regulations promulgated by agencies; (2) establish a sunset date for federal regulations; (3) subject "independent" agencies to executive branch regulatory review; and (4) develop a congressional regulatory analysis capability. Legislative proposals such as the REINS Act (Regulations from the Executive in Need of Scrutiny Act of 2015), would meet the first objective, while other discrete measures could advance the other three goals. Public choice considerations suggest that these reforms will not be easily achieved (beneficiaries of the intrusive regulatory status quo may be expected to vigorously oppose reform), but they nevertheless should be pursued posthaste.
My first instinct is to breathe a sigh of relief that even the NYC taxi commission eventually rejected the patently ridiculous notion that an international technology platform should have its update schedule in anyway dictated by the parochial interests of a local transportation fiefdom.
My second instinct is to grit my teeth in frustration that, in the face of the overwhelming transformation going on in the world today because of technology platforms offered by the likes of Uber and Lyft, anyone would even think to ask the question "should I ask the NYC taxi commission whether or not I can update the app on my users' smartphones?"
That said, it's important to take the world as you find it, not as you wish it to be, and so I want to highlight some items from the decision that deserve approbation.
Meera Josh, the NYC Taxi Commission chairperson and CEO, had this to say of the proposed rule:
We re-stylized the rules so they're tech agnostic because our point is not to go after one particular technology – things change quicker than we do – it's to provide baseline consumer protection and driver safety requirements[.]
I love that the commission gets this. The real power in the technology that drives the sharing economy is that it can change quickly in response to consumer demand. Further, regulators can offer value to these markets only when they understand that the nature of work and services are changing, and that their core justification as consumer protection agencies necessarily requires them to adjust when and how they intervene.
Although there is always more work to be done to make room for these entrepreneurial platforms (for instance, the NYC rules appear to require that all on-demand drivers – including the soccer mom down the street driving for Lyft – be licensed through the commission), this is generally forward-thinking. I hope that more municipalities across the country take notice, and that the relevant regulators follow suit in repositioning themselves as partners with these innovative companies.
Most American raisins are grown in California. Under a United States Department of Agriculture Raisin Marketing Order, California raisin growers must give a percentage of their crop to a Raisin Administrative Committee (a government entity largely comprised of raisin producers appointed by the Secretary of Agriculture) to sell, allocate, or dispose of, and the government sets the compensation price that growers are paid for these "reserved" raisins. After selling the reserved raisins and deducting expenses, the Committee returns any net proceeds to the growers. The Hornes were assessed a fine of $480,000 plus a $200,000 civil penalty for refusing to set aside raisins for the government in 2002. The Hornes sued in court, arguing that the reserve requirement violated the Fifth Amendment Takings Clause. The Ninth Circuit rejected the Hornes' claim that this was a per se taking, because personal property is entitled to less protection than private property, and concluded rather that this should be treated as a regulatory taking, such as a government condition on the grant of a land use permit. The Supreme Court reversed, holding that neither the text nor the history of the Takings Clause suggests that appropriation of personal property is different from appropriation of real property. The Court also held that the government may not avoid its categorical duty to pay just compensation by reserving to the property owner a contingent interest in the property. The Court further held that in this case, the government mandate to surrender property as a condition to engage in commerce effects a per se taking, noting that selling raisins in interstate commerce is "not a special governmental benefit that the Government may hold hostage, to be ransomed by the waiver of constitutional protection." The Court majority determined that the case should not be remanded to the Ninth Circuit to calculate the amount of just compensation, because the government already did so when it fined the Hornes $480,000, the fair market value of the raisins.
The Horne decision is a victory for economic freedom and the right of individuals not to participate in government cartel schemes that harm the public interest. Unfortunately, however, it is a limited one. As the dissent by Justice Sotomayor indicates, "the Government . . . can permissibly achieve its market control goals by imposing a quota without offering raisin producers a way of reaping any return whatsoever on the raisins they cannot sell." In short, today's holding turns entirely on the conclusion that the raisin marketing order involves a "physical taking" of raisins. A more straightforward regulatory scheme under which the federal government directly limited production by raisin growers (much as the government did to a small wheat farmer in Wickard v. Filburn) likely would pass constitutional muster under modern Commerce Clause jurisprudence.
Thus, if it is truly interested in benefiting the American public and ferreting out special interest favoritism in agriculture, Congress should give serious consideration to prohibiting far more than production limitations in agricultural marketing orders. More generally, it should consider legislation to bar any regulatory restrictions that have the effect of limiting the freedom of individual farmers to grow and sell as much of their crop as they please. Such a rule would promote general free market competition, to the benefit of American consumers and the American economy.
In 1990, Stephen Kimble obtained a patent on a toy that allows children (and young-at-heart adults) to role-play as "a spider person" by shooting webs—really, pressurized foam string—"from the palm of [the] hand." Marvel Entertainment made and sold a "Web-Blaster" toy based on Kimble's invention, without remunerating him. Kimble sued Marvel for patent infringement in 1997, and the parties settled, with Marvel agreeing to buy Kimble's patent for a lump sum (roughly a half-million dollars) plus a 3% royalty on future sales, with no end date set for the payment of royalties.
Marvel subsequently sought a declaratory judgment in federal district court confirming that it could stop paying Kimble royalties after the patent's expiration date. The district court granted relief, the Ninth Circuit Court of Appeals affirmed, and the Supreme Court affirmed the Ninth Circuit. In an opinion by Justice Kagan, joined by Justices Scalia, Kennedy, Ginsburg, Breyer, and Sotomayor, the Court held that a patentee cannot continue to receive royalties for sales made after his patent expires. Invoking stare decisis, the Court reaffirmed Brulotte v. Thys (1964), which held that a patent licensing agreement that provided for the payment of royalties accruing after the patent's expiration was illegal per se, because it extended the patent monopoly beyond its statutory time period. The Kimble Court stressed that stare decisis is "the preferred course," and noted that though the Brulotte rule may prevent some parties from entering into deals they desire, parties can often find ways to achieve similar outcomes.
Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented, arguing that Brulotte is a "baseless and damaging precedent" that interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent. More specifically:
"There are . . . good reasons why parties sometimes prefer post-expiration royalties over upfront fees, and why such arrangements have pro-competitive effects. Patent holders and licensees are often unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation. In those circumstances, deferred royalty agreements are economically efficient. They encourage innovators, like universities, hospitals, and other institutions, to invest in research that might not yield marketable products until decades down the line. . . . And they allow producers to hedge their bets and develop more products by spreading licensing fees over longer periods. . . . By prohibiting these arrangements, Brulotte erects an obstacle to efficient patent use. In patent law and other areas, we have abandoned per se rules with similarly disruptive effects. . . . [T]he need to avoid Brulotte is an economic inefficiency in itself. . . . And the suggested alternatives do not provide the same benefits as post-expiration royalty agreements. . . . The sort of agreements that Brulotte prohibits would allow licensees to spread their costs, while also allowing patent holders to capitalize on slow-developing inventions."
Furthermore, the Supreme Court was willing to overturn a nearly century-old antitrust precedent that absolutely barred resale price maintenance in the Leegin case, despite the fact that the precedent was extremely well know (much better known than the Brulotte rule) and had prompted a vast array of contractual workarounds. Given the seemingly greater weight of the Leegin precedent, why was stare decisis set aside in Leegin, but not in Kimble? The Kimble majority's argument that stare decisis should weigh more heavily in patent than in antitrust because, unlike the antitrust laws, "the patent laws do not turn over exceptional law-shaping authority to the courts", is unconvincing. As the dissent explains:
"[T]his distinction is unwarranted. We have been more willing to reexamine antitrust precedents because they have attributes of common-law decisions. I see no reason why the same approach should not apply where the precedent at issue, while purporting to apply a statute, is actually based on policy concerns. Indeed, we should be even more willing to reconsider such a precedent because the role implicitly assigned to the federal courts under the Sherman [Antitrust] Act has no parallel in Patent Act cases."
Stare decisis undoubtedly promotes predictability and the rule of law and, relatedly, institutional stability and efficiency – considerations that go to the costs of administering the legal system and of formulating private conduct in light of prior judicial precedents. The cost-based efficiency considerations underlying applying stare decisis to any particular rule, must, however, be weighed against the net economic benefits associated with abandonment of that rule. The dissent in Kimble did this, but the majority opinion regrettably did not.
In sum, let us hope that in the future the Court keeps in mind its prior advice, cited in Justice Alito's dissent, that "stare decisis is not an 'inexorable command'," and that "[r]evisiting precedent is particularly appropriate where . . . a departure would not upset expectations, the precedent consists of a judge-made rule . . . , and experience has pointed up the precedent's shortcomings."
In response to Grooveshark's shutdown in April, copycat sites began springing up. Initially, the record labels played a game of whac-a-mole as the copycats hopped from server to server within the United States. Ultimately the copycats settled on grooveshark.li, using a host and registrar outside of the country, as well as anonymized services that made direct action against the actual parties next to impossible. Instead of continuing the futile chase, the plaintiffs decided to address the problem more strategically.
High volume web sites like Grooveshark frequently depend upon third party providers to optimize their media streaming and related needs. In this case, the copycats relied upon the services of CloudFlare to provide DNS hosting and a content delivery network ("CDN"). Failing to thwart Grooveshark through direct action alone, the plaintiffs sought and were granted a TRO against certain third-parties, eventually served on CloudFlare, hoping to staunch the flow of infringing content by temporarily enjoining the ancillary activities that enabled the pirates to continue operations.
CloudFlare refused to comply with the TRO, claiming the TRO didn't apply to it (for reasons discussed below). The court disagreed, however, and found that CloudFlare was, in fact, bound by the TRO.
Unsurprisingly the copyright scolds came out strongly against the TRO and its application to CloudFlare, claiming that
Copyright holders should not be allowed to blanket infrastructure companies with blocking requests, co-opting them into becoming private trademark and copyright police.
Devlin Hartline wrote an excellent analysis of the court's decision that the TRO was properly applied to CloudFlare, concluding that it was neither improper nor problematic. In sum, as Hartline discusses, the court found that CloudFlare was indeed engaged in "active concert and participation" and was, therefore, properly subject to a TRO under FRCP 65 that would prevent it from further enabling the copycats to run their service.
Hartline's analysis is spot-on, but we think it important to clarify and amplify his analysis in a way that, we believe, actually provides insight into a much larger problem for CloudFlare.
As Hartline states,
This TRO wasn't about the "world at large," and it wasn't about turning the companies that provide internet infrastructure into the "trademark and copyright police." It was about CloudFlare knowingly helping the enjoined defendants to continue violating the plaintiffs' intellectual property rights.
Importantly, the issuance of the TRO turned in part on whether the plaintiffs were likely to succeed on the merits — which is to say that the copycats could in fact be liable for copyright infringement. Further, the initial TRO became a preliminary injunction before the final TRO hearing because the copycats failed to show up to defend themselves. Thus, CloudFlare was potentially exposing itself to a claim of contributory infringement, possibly from the time it was notified of the infringing activity by the RIAA. This is so because a claim of contributory liability would require that CloudFlare "knowingly" contributed to the infringement. Here there was actual knowledge upon issuance of the TRO (if not before).
However, had CloudFlare gone along with the proceedings and complied with the court's order in good faith, § 512 of the Digital Millennium Copyright Act (DMCA) would have provided a safe harbor. Nevertheless, following from CloudFlare's actual behavior, the company does now have a lot more to fear than a mere TRO.
Although we don't have the full technical details of how CloudFlare's service operates, we can make some fair assumptions. Most importantly, in order to optimize the content it serves, a CDN would necessarily have to store that content at some point as part of an optimizing cache scheme. Under the terms of the DMCA, an online service provider (OSP) that engages in caching of online content will be immune from liability, subject to certain conditions. The most important condition relevant here is that, in order to qualify for the safe harbor, the OSP must "expeditiously [] remove, or disable access to, the material that is claimed to be infringing upon notification of claimed infringement[.]"
Here, not only had CloudFlare been informed by the plaintiffs that it was storing infringing content, but a district court had gone so far as to grant a TRO against CloudFlare's serving of said content. It certainly seems plausible to view CloudFlare as acting outside the scope of the DMCA safe harbor once it refused to disable access to the infringing content after the plaintiffs contacted it, but certainly once the TRO was deemed to apply to it.
To underscore this point, CloudFlare's arguments during the TRO proceedings essentially admitted to knowledge that infringing material was flowing through its CDN. CloudFlare focused its defense on the fact that it was not an active participant in the infringing activity, but was merely a passive network through which the copycats' content was flowing. Moreover, CloudFlare argued that
Even if [it]—and every company in the world that provides similar services—took proactive steps to identify and block the Defendants, the website would remain up and running at its current domain name.
But while this argument may make some logical sense from the perspective of a party resisting an injunction, it amounts to a very big admission in terms of a possible infringement case — particularly given CloudFlare's obstinance in refusing to help the plaintiffs shut down the infringing sites.
As noted above, CloudFlare had an affirmative duty to to at least suspend access to infringing material once it was aware of the infringement (and, of course, even more so once it received the TRO). Instead, CloudFlare relied upon its "impossibility" argument against complying with the TRO based on the claim that enjoining CloudFlare would be futile in thwarting the infringement of others. CloudFlare does appear to have since complied with the TRO (which is now a preliminary injunction), but the compliance does not change a very crucial fact: knowledge of the infringement on CloudFlare's part existed before the preliminary injunction took effect, while CloudFlare resisted the initial TRO as well as RIAA's efforts to secure compliance.
Phrased another way, CloudFlare became an infringer by virtue of having cached copyrighted content and been given notice of that content. However, in its view, merely removing CloudFlare's storage of that copyrighted content would have done nothing to prevent other networks from also storing the copyrighted content, and therefore it should not be enjoined from its infringing behavior. This essentially amounts to an admission of knowledge of infringing content being stored in its network.
It would be hard to believe that CloudFlare's counsel failed to advise it to consider the contributory infringement issues that could arise from its conduct prior to and during the TRO proceedings. Thus CloudFlare's position is somewhat perplexing, particularly once the case became a TRO proceeding. CloudFlare could perhaps have made technical arguments against the TRO in an attempt to demonstrate to its customers that it didn't automatically shut down services at the behest of the RIAA. It could have done this in good faith, and without the full-throated "impossibility" argument that could very plausibly draw them into infringement litigation. But whatever CloudFlare thought it was gaining in taking a "moral" stance on behalf of OSPs everywhere with its "impossibility" argument, it may well have ended up costing itself much more.
It's becoming more and more clear that there should be real concerns about the direction the EU is heading with its DSM. As the EU moves forward with the 16 different action proposals that make up this ambitious strategy, we should all pay special attention to the actual rules that come out of it, such as the recent Data Protection Regulation. Are EU regulators simply trying to hogtie innovators in the the wild, wild, west, as some have suggested? Let's break it down. Here are The Good, The Bad, and the Ugly.
The Good
The Data Protection Regulation, as proposed by the Ministers of Justice Council and to be taken up in trilogue negotiations with the Parliament and Council this month, will set up a single set of rules for companies to follow throughout the EU. Rather than having to deal with the disparate rules of 28 different countries, companies will have to follow only the EU-wide Data Protection Regulation. It's hard to determine whether the EU is right about its lofty estimate of this benefit (€2.3 billion a year), but no doubt it's positive. This is what free trade is about: making commerce "regular" by reducing barriers to trade between states and nations.
Additionally, the Data Protection Regulation would create a "one-stop shop" for consumers and businesses alike. Regardless of where companies are located or process personal information, consumers would be able to go to their own national authority, in their own language, to help them. Similarly, companies would need to deal with only one supervisory authority.
Further, there will be benefits to smaller businesses. For instance, the Data Protection Regulation will exempt businesses smaller than a certain threshold from the obligation to appoint a data protection officer if data processing is not a part of their core business activity. On top of that, businesses will not have to notify every supervisory authority about each instance of collection and processing, and will have the ability to charge consumers fees for certain requests to access data. These changes will allow businesses, especially smaller ones, to save considerable money and human capital. Finally, smaller entities won't have to carry out an impact assessment before engaging in processing unless there is a specific risk. These rules are designed to increase flexibility on the margin.
If this were all the rules were about, then they would be a boon to the major American tech companies that have expressed concern about the DSM. These companies would be able to deal with EU citizens under one set of rules and consumers would be able to take advantage of the many benefits of free flowing information in the digital economy.
The Bad
Unfortunately, the substance of the Data Protection Regulation isn't limited simply to preempting 28 bad privacy rules with an economically sensible standard for Internet companies that rely on data collection and targeted advertising for their business model. Instead, the Data Protection Regulation would set up new rules that will impose significant costs on the Internet ecosphere.
For instance, giving citizens a "right to be forgotten" sounds good, but it will considerably impact companies built on providing information to the world. There are real costs to administering such a rule, and these costs will not ultimately be borne by search engines, social networks, and advertisers, but by consumers who ultimately will have to find either a different way to pay for the popular online services they want or go without them. For instance, Google has had to hire a large "team of lawyers, engineers and paralegals who have so far evaluated over half a million URLs that were requested to be delisted from search results by European citizens."
Privacy rights need to be balanced with not only economic efficiency, but also with the right to free expression that most European countries hold (though not necessarily with a robust First Amendment like that in the United States). Stories about the right to be forgotten conflicting with the ability of journalists to report on issues of public concern make clear that there is a potential problem there. The Data Protection Regulation does attempt to balance the right to be forgotten with the right to report, but it's not likely that a similar rule would survive First Amendment scrutiny in the United States. American companies accustomed to such protections will need to be wary operating under the EU's standard.
Similarly, mandating rules on data minimization and data portability may sound like good design ideas in light of data security and privacy concerns, but there are real costs to consumers and innovation in forcing companies to adopt particular business models.
Mandated data minimization limits the ability of companies to innovate and lessens the opportunity for consumers to benefit from unexpected uses of information. Overly strict requirements on data minimization could slow down the incredible growth of the economy from the Big Data revolution, which has provided a plethora of benefits to consumers from new uses of information, often in ways unfathomable even a short time ago. As an article in Harvard Magazine recently noted,
The story [of data analytics] follows a similar pattern in every field… The leaders are qualitative experts in their field. Then a statistical researcher who doesn't know the details of the field comes in and, using modern data analysis, adds tremendous insight and value.
And mandated data portability is an overbroad per se remedy for possible exclusionary conduct that could also benefit consumers greatly. The rule will apply to businesses regardless of market power, meaning that it will also impair small companies with no ability to actually hurt consumers by restricting their ability to take data elsewhere. Aside from this, multi-homing is ubiquitous in the Internet economy, anyway. This appears to be another remedy in search of a problem.
The bad news is that these rules will likely deter innovation and reduce consumer welfare for EU citizens.
The Ugly
Finally, the Data Protection Regulation suffers from an ugly defect: it may actually be ratifying a form of protectionism into the rules. Both the intent and likely effect of the rules appears to be to "level the playing field" by knocking down American Internet companies.
For instance, the EU has long allowed flexibility for US companies operating in Europe under the US-EU Safe Harbor. But EU officials are aiming at reducing this flexibility. As the Wall Street Journal has reported:
For months, European government officials and regulators have clashed with the likes of Google, Amazon.com and Facebook over everything from taxes to privacy…. "American companies come from outside and act as if it was a lawless environment to which they are coming," [Commissioner Reding] told the Journal. "There are conflicts not only about competition rules but also simply about obeying the rules." In many past tussles with European officialdom, American executives have countered that they bring innovation, and follow all local laws and regulations… A recent EU report found that European citizens' personal data, sent to the U.S. under Safe Harbor, may be processed by U.S. authorities in a way incompatible with the grounds on which they were originally collected in the EU. Europeans allege this harms European tech companies, which must play by stricter rules about what they can do with citizens' data for advertising, targeting products and searches. Ms. Reding said Safe Harbor offered a "unilateral advantage" to American companies.
Thus, while "when in Rome…" is generally good advice, the Data Protection Regulation appears to be aimed primarily at removing the "advantages" of American Internet companies—at which rent-seekers and regulators throughout the continent have taken aim. As mentioned above, supporters often name American companies outright in the reasons for why the DSM's Data Protection Regulation are needed. But opponents have noted that new regulation aimed at American companies is not needed in order to police abuses:
Speaking at an event in London, [EU Antitrust Chief] Ms. Vestager said it would be "tricky" to design EU regulation targeting the various large Internet firms like Facebook, Amazon.com Inc. and eBay Inc. because it was hard to establish what they had in common besides "facilitating something"… New EU regulation aimed at reining in large Internet companies would take years to create and would then address historic rather than future problems, Ms. Vestager said. "We need to think about what it is we want to achieve that can't be achieved by enforcing competition law," Ms. Vestager said.
Moreover, of the 15 largest Internet companies, 11 are American and 4 are Chinese. None is European. So any rules applying to the Internet ecosphere are inevitably going to disproportionately affect these important, US companies most of all. But if Europe wants to compete more effectively, it should foster a regulatory regime friendly to Internet business, rather than extend inefficient privacy rules to American companies under the guise of free trade.
Near the end of the The Good, the Bad, and the Ugly, Blondie and Tuco have this exchange that seems apropos to the situation we're in:
Blondie: [watching the soldiers fighting on the bridge] I have a feeling it's really gonna be a good, long battle.
Tuco: Blondie, the money's on the other side of the river.
Blondie: Oh? Where?
Tuco: Amigo, I said on the other side, and that's enough. But while the Confederates are there we can't get across.
Blondie: What would happen if somebody were to blow up that bridge?
The EU's DSM proposals are going to be a good, long battle. But key players in the EU recognize that the tech money — along with the services and ongoing innovation that benefit EU citizens — is really on the other side of the river. If they blow up the bridge of trade between the EU and the US, though, we will all be worse off — but Europeans most of all.
[when] a proposed merger significantly increases concentration in an already highly concentrated market, a presumption of competitive harm is justified under both the Guidelines and well-established case law." (Emphasis added).
Commissioner Wright dissented in both matters (here and here), contending that
[the majority's] reliance upon such shorthand structural presumptions untethered from empirical evidence subsidize a shift away from the more rigorous and reliable economic tools embraced by the Merger Guidelines in favor of convenient but obsolete and less reliable economic analysis.
Josh has the better argument, of course. In both cases the majority relied upon its structural presumption rather than actual economic evidence to make out its case. But as Josh notes in his dissent in In the Matter of ZF Friedrichshafen and TRW Automotive (quoting his 2013 dissent in In the Matter of Fidelity National Financial, Inc. and Lender Processing Services):
there is no basis in modern economics to conclude with any modicum of reliability that increased concentration—without more—will increase post-merger incentives to coordinate. Thus, the Merger Guidelines require the federal antitrust agencies to develop additional evidence that supports the theory of coordination and, in particular, an inference that the merger increases incentives to coordinate.
Or as he points out in his dissent in In the Matter of Holcim Ltd. and Lafarge S.A.
The unifying theme of the unilateral effects analysis contemplated by the Merger Guidelines is that a particularized showing that post-merger competitive constraints are weakened or eliminated by the merger is superior to relying solely upon inferences of competitive effects drawn from changes in market structure.
It is unobjectionable (and uninteresting) that increased concentration may, all else equal, make coordination easier, or enhance unilateral effects in the case of merger to monopoly. There are even cases (as in generic pharmaceutical markets) where rigorous, targeted research exists, sufficient to support a presumption that a reduction in the number of firms would likely lessen competition. But generally (as in these cases), absent actual evidence, market shares might be helpful as an initial screen (and may suggest greater need for a thorough investigation), but they are not analytically probative in themselves. As Josh notes in his TRW dissent:
The relevant question is not whether the number of firms matters but how much it matters.
The majority in these cases asserts that it did find evidence sufficient to support its conclusions, but — and this is where the rubber meets the road — the question remains whether its limited evidentiary claims are sufficient, particularly given analyses that repeatedly come back to the structural presumption. As Josh says in his Holcim dissent:
it is my view that the investigation failed to adduce particularized evidence to elevate the anticipated likelihood of competitive effects from "possible" to "likely" under any of these theories. Without this necessary evidence, the only remaining factual basis upon which the Commission rests its decision is the fact that the merger will reduce the number of competitors from four to three or three to two. This is simply not enough evidence to support a reason to believe the proposed transaction will violate the Clayton Act in these Relevant Markets.
Looking at the majority's statements, I see a few references to the kinds of market characteristics that could indicate competitive concerns — but very little actual analysis of whether these characteristics are sufficient to meet the Clayton Act standard in these particular markets. The question is — how much analysis is enough? I agree with Josh that the answer must be "more than is offered here," but it's an important question to explore more deeply.
Presumably that's exactly what the ABA's upcoming program will do, and I highly recommend interested readers attend or listen in. The program details are below.
June 26, 2015, 12:00 PM – 1:15 PM ET
In-person location:
Latham & Watkins
555 11th Street,NW
Ste 1000
Washington, DC 20004
Register here.
On Monday, Consumer Watchdog petitioned the FCC to not only apply Customer Proprietary Network Information (CPNI) rules originally meant for telephone companies to ISPs, but to also start a rulemaking to require edge providers to honor Do Not Track requests in order to "promote broadband deployment" under Section 706. Of course, we warned of this possibility in our joint ICLE-TechFreedom legal comments:
For instance, it is not clear why the FCC could not, through Section 706, mandate "network level" copyright enforcement schemes or the DNS blocking that was at the heart of the Stop Online Piracy Act (SOPA). . . Thus, it would appear that Section 706, as re-interpreted by the FCC, would, under the D.C. Circuit's Verizon decision, allow the FCC sweeping power to regulate the Internet up to and including (but not beyond) the process of "communications" on end-user devices. This could include not only copyright regulation but everything from cybersecurity to privacy to technical standards. (emphasis added).
While the merits of Do Not Track are debatable, it is worth noting that privacy regulation can go too far and actually drastically change the Internet ecosystem. In fact, it is actually a plausible scenario that overregulating data collection online could lead to the greater use of paywalls to access content. This may actually be a greater threat to Internet Openness than anything ISPs have done.
And then yesterday, the first complaint under the new Open Internet rule was brought against Time Warner Cable by a small streaming video company called Commercial Network Services. According to several news stories, CNS "plans to file a peering complaint against Time Warner Cable under the Federal Communications Commission's new network-neutrality rules unless the company strikes a free peering deal ASAP." In other words, CNS is asking for rate regulation for interconnection. Under the Open Internet Order, the FCC can rule on such complaints, but it can only rule on a case-by-case basis. Either TWC assents to free peering, or the FCC intervenes and sets the rate for them, or the FCC dismisses the complaint altogether and pushes such decisions down the road.
This was another predictable development that many critics of the Open Internet Order warned about: there was no way to really avoid rate regulation once the FCC reclassified ISPs. While the FCC could reject this complaint, it is clear that they have the ability to impose de facto rate regulation through case-by-case adjudication. Whether it is rate regulation according to Title II (which the FCC ostensibly didn't do through forbearance) is beside the point. This will have the same practical economic effects and will be functionally indistinguishable if/when it occurs.
In sum, while neither of these actions were contemplated by the FCC (they claim), such abstract rules are going to lead to random complaints like these, and companies are going to have to use the "ask FCC permission" process to try to figure out beforehand whether they should be investing or whether they're going to be slammed. As Geoff Manne said in Wired:
That's right—this new regime, which credits itself with preserving "permissionless innovation," just put a bullet in its head. It puts innovators on notice, and ensures that the FCC has the authority (if it holds up in court) to enforce its vague rule against whatever it finds objectionable.
I mean, I don't wanna brag or nothin, but it seems to me that we critics have been right so far. The reclassification of broadband Internet service as Title II has had the (supposedly) unintended consequence of sweeping in far more (both in scope of application and rules) than was supposedly bargained for. Hopefully the FCC rejects the petition and the complaint and reverses this course before it breaks the Internet.
The Telephone Consumer Protection Act ("TCPA") is back in the news following a letter sent to PayPal from the Enforcement Bureau of the FCC. At issue are amendments that PayPal intends to introduce into its end user agreement. Specifically, PayPal is planning on including an automated call and text message system with which it would reach out to its users to inform them of account updates, perform quality assurance checks, and provide promotional offers.
Enter the TCPA, which, as the Enforcement Bureau noted in its letter, has been used for over twenty years by the FCC to "protect consumers from harassing, intrusive, and unwanted calls and text messages." The FCC has two primary concerns in its warning to PayPal. First, there was no formal agreement between PayPal and its users that would satisfy the FCC's rules and allow PayPal to use an automated call system. And, perhaps most importantly, PayPal is not entitled to simply attach an "automated calls" clause to its user agreement as a condition of providing the PayPal service (as it clearly intends to do with its amendments).
There are a number of things wrong with the TCPA and the FCC's decision to enforce its provisions against PayPal in the current instance. The FCC has the power to provide for some limited exemptions to the TCPA's prohibition on automated dialing systems. Most applicable here, the FCC has the discretion to provide exemptions where calls to cell phone users won't result in those users being billed for the calls. Although most consumers still buy plans that allot minutes for their monthly use, the practical reality for most cell phone users is that they no longer need to count minutes for every call. Users typically have a large number of minutes on their plans, and certainly many of those minutes can go unused. It seems that the progression of technology and the economics of cellphones over the last twenty-five years should warrant a Congressional revisit to the underlying justifications of at least this prohibition in the TCPA.
However, exceptions aside, there remains a much larger issue with the TCPA, one that is also rooted in the outdated technological assumptions underlying the law. The TCPA was meant to prevent dedicated telemarketing companies from using the latest in "automated dialing" technology circa 1991 from harassing people. It was not intended to stymie legitimate businesses from experimenting with more efficient methods of contacting their own customers.
The text of the law underscores its technological antiquity: according to the TCPA, an "automatic telephone dialing system" means equipment which "has the capacity" to sequentially dial random numbers. This is to say, the equipment that was contemplated when the law was written was software-enabled phones that were purpose built to enable telemarketing firms to make blanket cold calls to every number in a given area code. The language clearly doesn't contemplate phones connected to general purpose computing resources, as most phone systems are today.
The modern phone systems, connected to intelligent computer backends, are designed to flexibly reach out to hundreds or thousands of existing customers at a time, and in a way that efficiently enhances the customer's experience with the company. Technically, yes, these systems are capable of auto-dialing a large number of random recipients; however, when a company like PayPal uses this technology, its purpose is clearly different than that employed by the equivalent of spammers on the phone system. Not having a nexus between an intent to random-dial and a particular harm experienced by an end user is a major hole in the TCPA. Particularly in this case, it seems fairly absurd that the TCPA could be used to prevent PayPal from interacting with its own customers.
Further, there is a lot at stake for those accused of violating the TCPA. In the PayPal warning letter, the FCC noted that it is empowered to levy a $16,000 fine per call or text message that it finds violates the terms of the TCPA. That's bad, but it's nowhere near as bad as it could get. The TCPA also contains a private right of action that was meant to encourage individual consumers to take telemarketers to small claims court in their local state. Each individual consumer is entitled to receive provable damages or statutory damages of $500.00, whichever is greater. If willfulness can be proven, the damages are trebled, which in effect means that most individual plaintiffs in the know will plead willfulness, and wait for either a settlement conference or trial to sort the particulars out.
However, over the years a cottage industry has built up around class action lawyers aggregating "harmed" plaintiffs who had received unwanted automatic calls or texts, and forcing settlements in the tens of millions of dollars. The math is pretty simple. A large company with lots of customers may be tempted to use an automatic system to send out account information and offer alerts. If it sends out five hundred thousand auto calls or texts, that could result in "damages" in the amount of $250M in a class action suit. A settlement for five or ten million dollars is a deal by comparison. For instance, in 2013 Bank of America entered into a $32M settlement for texts and calls made between 2007 and 2013 to 7.7 million people. If they had gone to trial and lost, the damages could have been as much as $3.8B!
The purpose of the TCPA was to prevent abusive telemarketers from harassing people, not to defeat the use of an entire technology that can be employed to increase efficiency for businesses and lower costs for consumers. The per call penalties associated with violating the TCPA, along with imprecise and antiquated language in the law, provide a major incentive to use the legal system to punish well-meaning companies that are just operating their non-telemarketing businesses in a reasonable manner. It's time to seriously revise this law in light of the changes in technology over the past twenty-five years.
As our article explains, international trade agreements simply do not reach a variety of anticompetitive welfare-reducing government measures that create de facto trade barriers by favoring domestic interests over foreign competitors. Moreover, many of these restraints are not in place to discriminate against foreign entities, but rather exist to promote certain favored firms. We dub these restrictions "anticompetitive market distortions" or "ACMDs," in that they involve government actions that empower certain private interests to obtain or retain artificial competitive advantages over their rivals, be they foreign or domestic. ACMDs are often a manifestation of cronyism, by which politically-connected enterprises successfully pressure government to shield them from effective competition, to the detriment of overall economic growth and welfare. As we emphasize in our article, existing international trade rules have been able to reach ACMDs, which include: (1) governmental restraints that distort markets and lessen competition; and (2) anticompetitive private arrangements that are backed by government actions, have substantial effects on trade outside the jurisdiction that imposes the restrictions, and are not readily susceptible to domestic competition law challenge. Among the most pernicious ACMDs are those that artificially alter the cost-base as between competing firms. Such cost changes will have large and immediate effects on market shares, and therefore on international trade flows.
Likewise, with the growing internationalization of commerce, ACMDs not only diminish domestic consumer welfare – they increasingly may have a harmful effect on foreign enterprises that seek to do business in the country imposing the restraint. The home nations of the affected foreign enterprises, moreover, may as a practical matter find it not feasible to apply their competition laws extraterritorially to curb the restraint, given issues of jurisdictional reach and comity (particularly if the restraint flies under the colors of domestic law). Because ACMDs also have not been constrained by international trade liberalization initiatives, they pose a serious challenge to global welfare enhancement by curtailing potential trade and investment opportunities.
Interest group politics and associated rent-seeking by well-organized private actors are endemic to modern economic life, guaranteeing that ACMDs will not easily be dismantled. What is to be done, then, to curb ACMDs?
As a first step, Shanker Singham and I have proposed the development of a metric to estimate the net welfare costs of ACMDs. Such a metric could help strengthen the hand of international organizations (including the International Competition Network, the World Bank, and the OECD) – and of reform-minded public officials – in building the case for dismantling these restraints, or (as a last resort) replacing them with less costly means for benefiting favored constituencies. (Singham, two other coauthors, and I have developed a draft paper that delineates a specific metric, which we hope will be suitable for public release in the near future.)
Furthermore, free market-oriented think tanks can also be helpful by highlighting the harm special interest governmental restraints impose on the economy and on economic freedom. In that regard, the Heritage Foundation's excellent work in opposing cronyism deserves special mention.
Working to eliminate ACMDs and thereby promoting economic liberty is an arduous long-term task – one that will only succeed in increments, one battle at a time (the current principled effort to eliminate the Ex-Im Bank, strongly supported by the Heritage Foundation, is one such example). Nevertheless, it is very much worth the candle.
U.S. industries that rely on copyright protection (such as motion pictures, music, television, visual arts, and software) are threatened by the unauthorized Internet downloading of copyrighted writings, designs, artwork, music and films. U.S. policymakers must decide how best to protect the creators of copyrighted works without harming growth and innovation in Internet services or vital protections for free speech.
The Internet allows consumers to alter and immediately transmit perfect digital copies of copyrighted works around the world and has generated services designed to provide these tools. Those tools include, for example, peer-to-peer file-sharing services and mobile apps designed to foster infringement. Many websites that provide pirated content—including, for example, online video-streaming sites—are located outside the United States. Such piracy costs the U.S. economy billions of dollars in losses per year—including reduced income for creators and other participants in copyright-intensive industries.
Curtailing online infringement will require a combination of litigation, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders and business innovations that lessen incentives to infringe.