New paper on the FTC’s dangerously broad Section 5 authority

by on November 14, 2013 · 0 comments

The following is a guest post by James C. Cooper of George Mason University School of Law.

What are the limits to the FTC’s Section 5 antitrust authority? The short answer is, who knows. The FTC has been on a 100-year quest to find the maleficence that it alone was meant to combat. Early in its history, the Supreme Court appeared to give the FTC license to challenge a wide range of conduct that had little to do with competition. A series of appellate setbacks in the 1980s – relating largely to claims that Section 5 could reach tacit collusion and oligopolistic interdependence – led the Commission to retrench. Since then, the FTC has avoided litigating a Section 5 case, focusing primarily on invitations to collude (ITCs), and breaches of agreements to disclose or to license standard essential patents. Of course since all of these cases have settled, no court has had to opportunity to weigh in on whether Congress meant Section 5 to cover this type of conduct.

In my new Mercatus Center working paper, The Perils of Excessive Discretion: The Elusive Meaning of Unfairness in Section 5 of the FTC Act, I argue that the undefined nature of Section 5 leaves the FTC with broad discretion to investigate and extract settlements from companies. Although the appellate rebukes of the 1980s provide some clear boundaries, given firms’ understandable aversion to litigation – especially when only injunctive relief is on the table, and when the risk of follow-on private suits is much lower than it would be under a Sherman Act settlement – there is still a relatively large zone in which the FTC can develop this quasi Section 5 common law with little fear of triggering litigation, which would lead to appellate review. (A similar problem exists with respect to the FTC’s use of its Section 5 authority to become the de facto national privacy and data security regulator, but that’s another post).

Some commissioners saw the Google case as a perfect vehicle for the elusive “stand alone Section 5 case.” But rather than clarifying things, the Commission left a muddle. Although the Commission eventually decided to close its investigation, the multiple statements accompanying this decision suggest several directions in which some commissioners were willing to take Section 5, without offering any coherent framework or limits, revealing the truly confused nature of Section 5 and the concomitant wide discretion that the Commission enjoys to determine what Section 5 covers.

So what are the costs of so much discretion in the hands of the FTC? Uncertainty and rent seeking. Businesses uncertain about where the line between illegality and legality rests may be tempted to pull their competitive punches to limit the risk of an FTC investigation. Further, because defining what constitutes an “unfair method of competition” is so subjective an exercise, firms rationally devote resources to curry favor with those who reside at 600 Pennsylvania Avenue. One only need to look at the well-documented lobbying fest – both by Google and its opponents – that accompanied the Google investigation. This diversion of resources from productive to redistributive use may be a boon for private lawyers and economists, but it’s bad for consumers.

What are the answers? Probably the best course would be for the FTC – or Congress –permanently to tether Section 5 to the Sherman Act. Section 5 may have had a role to play very early in its history to the extent that the Sherman Act was too narrowly construed, but we don’t have that problem any more. Even after cases like Trinko, Twombly, and Credit Suisse, the Sherman Act is capacious, fully capable of accommodating conduct that threatens competition. True, this path would leave breaches of FRAND commitments and ITCs involving small firms beyond the FTC’s bailiwick. But the costs of ignoring such conduct are likely to be low. Breaches of FRAND commitments are at base contract disputes between sophisticated parties, and its not as if there is a lack of institutions to deal with this problem: courts have shown themselves able to wade into these complex issues. ITCs can be harmful, but only when the invitation blossoms into an agreement, in which case it can be challenged under the Sherman Act.

Another course would be for the Commission to issue guidelines. This path – the unfairness, deception, and ad substantiation statements – did wonders for the legitimacy of the FTC’s consumer protection program in the 1980s. What should Section 5 guidelines look like? They should proscribe a narrow domain, focusing only on conduct that (1) clearly is harmful (or poses a significant threat of substantial harm) to consumers through its effect on competition, (2) is unlikely to generate any cognizable efficiencies, and (3) but for the application of Section 5, would remain unremedied. In practice, this would mean retaining only ITCs and certain information sharing by non-dominant firms that is likely to facilitate collusion.

The economic sophistication of antitrust jurisprudence has progressed light years since the last Supreme Court case involving a Section 5 claim, during the era of Schwinn and Utah Pie. Maybe the fact that the Commission and antitrust commentators have searched so hard and so long for the elusive conduct that Section 5 alone was designed to tackle is a signal that such conduct does not exist. Perhaps Section 5 should go the way of the Robinson-Patman Act, another antitrust statute of a similar vintage that has been overtaken by economics to the point that neither the FTC nor the Antitrust Division enforces it.

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