Time for Congress to Cancel the FTC’s Section 5 Antitrust Blank Check

by on December 20, 2012 · 0 comments

By Geoffrey Manne and Berin Szoka

A debate is brewing in Congress over whether to allow the Federal Trade Commission to sidestep decades of antitrust case law and economic theory to define, on its own, when competition becomes “unfair.” Unless Congress cancels the FTC’s blank check, uncertainty about the breadth of the agency’s power will chill innovation, especially in the tech sector. And sadly, there’s no reason to believe that such expansive power will serve consumers.

Last month, Senators and Congressmen of both parties sent a flurry of letters to the FTC warning against overstepping the authority Congress granted the agency in 1914 when it enacted Section 5 of the FTC Act. FTC Chairman Jon Leibowitz has long expressed a desire to stake out new antitrust authority under Section 5 over unfair methods of competition that would otherwise be legal under the Sherman and Clayton antitrust acts. He seems to have had Google in mind as a test case.

On Monday, Congressmen John Conyers and Mel Watt, the top two Democrats on the House Judiciary Committee, issued their own letter telling us not to worry about the larger principle at stake. The two insist that “concerns about the use of Section 5 are unfounded” because “[w]ell established legal principles set forth by the Supreme Court provide ample authority for the FTC to address potential competitive concerns in the relevant market, including search.” The second half of that sentence is certainly true: the FTC doesn’t need a “standalone” Section 5 case to protect consumers from real harms to competition. But that doesn’t mean the FTC won’t claim such authority—and, unfortunately, there’s little by way of “established legal principles” stop the agency from overreaching.

The Conyers-Watt letter cites four Supreme Court cases (Aspen Skiing, Otter Tail Power, Lorrain Journal and Indiana Federation of Dentists), the latest decided in 1986, that deal only with the Sherman Act or that reference Section 5 only as the statutory basis by which the FTC enforces, indirectly, the Sherman Act. But what conduct does Section 5 allow the FTC to prosecute beyond the Sherman Act? The fifth case cited, Sperry & Hutchinson, from 1972, was the last time the Supreme Court directly addressed this critical question, holding that the FTC “does not arrogate excessive power to itself if, in measuring a practice against the elusive, but congressionally mandated standard of fairness, it, like a court of equity, considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.” Yet, even there, the Court concluded the FTC would have prevailed under the Sherman Act—thus leaving unresolved what a standalone Section 5 case could cover. Fourteen years later, the Court dodged the question again in Indiana Federation of Dentists, noting that, although Section 5 covers something more than the Sherman and Clayton acts, the Sherman Act provided the sole basis for liability in that case. Of Section 5, the Court in Indiana Federation of Dentists said merely that “the standard of ‘unfairness’ under the FTC Act is, by necessity, an elusive one.”

Elusive. Try telling that to your shareholders—or investors looking for The Next Big Thing—when asked how the FTC might regulate innovative business methods!

The FTC has been down this road before—starting with the same Sperry & Hutchinson decision cited by Conyers and Watt. The FTC interpreted that 1972 decision as a blank check to use its authority over unfair trade practices (distinct from, but related to, its authority over unfair methods of competition) to regulate everything from funeral parlors to children’s advertising. But the FTC’s overreach provoked widespread outcry, causing the Washington Post to blast the agency as the “National Nanny.” The Democratic Congress briefly closed the agency, slashed its budget and, in 1980, ordered the Commission to establish legal limiting principles in the form of a formal policy statement on unfairness (followed in 1983 by one on deception). That statement bars the FTC from banning a practice as unfair simply because a majority of Commissioners decide it is “immoral” or in violation of public policy; instead the Commission must show that it violates public policy that is “widely-shared” and “clear and well-established in law or that causes a substantial injury to consumers without countervailing benefits and which consumers cannot reasonably avoid. Congress enshrined this doctrine into law in 1994.

But the Commission has never issued any such policy statement about Section 5’s unfair competition language—and Congress has never bothered to intervene, even though the FTC has begun exploiting this uncertainty as additional leverage in “convincing” companies to settle shaky antitrust cases. That’s precisely what happened in the Intel case where, as we’ve explained, Intel settled a questionable complaint, probably because it concluded that that settling the case was less costly than litigating it. While such outcomes may bolster the agency’s power, they do nothing to protect consumers and serve instead to chill business conduct that would benefit consumers.

That dynamic is a major reason why the FTC gets away with pushing the boundaries of its authority. Litigation in court is costly enough, but the agency can always threaten companies with an administrative “Part III” litigation—meaning the company would have to spend upwards of a year litigating before the FTC’s Administrative Law Judge and then the full Commission, almost certainly suffering two losses, both PR disasters, before ever getting to an independent, neutral tribunal. So it’s not surprising that most companies settle. Sure, they might win in court eventually, but if the FTC is talking to you about a standalone Section 5 case while pressuring you to settle a case in a consent decree… well, “you’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”

High-tech companies are particularly likely to find themselves the targets of Section 5 sabre-rattling. Cutting-edge companies are often antitrust test-cases because technological innovation goes hand-in-hand with innovations in business practices, from consumer pricing to “coopetition” partnerships between rivals. They’re more likely to settle rather than litigate because they’re terrified of squandering money, investor goodwill and management time on litigation—lest, like Microsoft, they fall behind their rivals even as they are demonized as rapacious monopolists in the press. At the same time, Internet-related cases tend to attract a unique degree of popular attention, driving antitrust regulators to show they’re “doing something” about a perceived problem. Even the best regulators all too easily fall prey to the costly tendency described by Nobel economist Ronald Coase: “if an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation.”

We can’t wait for the courts to fix this problem—not least because the tendency for these cases to settle out of court means it may be a long while before any court gets the chance. At a minimum, Congress should insist that the FTC convene a public workshop aimed at identifying what a valid standalone Section 5 case could cover—followed by formal guidelines, as we’ve urged. If the FTC cannot rigorously define an interpretation of Section 5 that will actually serve consumer welfare—which the Supreme Court has defined as the proper aim of antitrust law—Congress should expressly limit Section 5’s prohibition of unfair competition only to invitations to collude (which aren’t cognizable under the Sherman Act).

As the FTC’s policy statement on unfairness puts it, “[t]he Supreme Court has stated on many occasions that the definition of ‘unfairness’ is ultimately one for judicial determination.” But for the courts to play that vital role in defining the “elusive,” Congress may need to reassess how the FTC operates. That might start with requiring the agency to bring suit directly in federal court, just as the Department of Justice does. But it also means much more careful Congressional oversight of what the FTC does across the board. Otherwise, the Commission may once again, as it did in the 1970s, become a second national legislature—with three political appointees deciding what’s “fair” for the entire economy, especially the high-tech sector.

[Crossposted at Forbes.com]

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