Thursday, January 7, 2010
Posted by Josh Wright
Employing Section 5 of the Federal Trade Commission Act to evade Section 2 monopolization law is not a legitimate use of Section 5. This is, unfortunately, the only reasonable interpretation of the Commission’s choice to make Section 5 the primary hook of its Intel complaint. While there is no doubt that Section 5 of the FTC Act was intended to allow the Commission to fill “gaps” in antitrust enforcement under the Sherman Act, the FTC’s attempts to pigeonhole its Section 5 complaint into this “gap” filling rationale is not persuasive.
Let’s start with the FTC’s joint statement in support of the Section 5 case:
Despite the long history of Section 5, until recently the Commission has not pursued free-standing unfair method of competition claims outside of the most well accepted areas, partly because the antitrust laws themselves have in the past proved flexible and capable of reaching most anticompetitive conduct. However, concern over class actions, treble damages awards, and costly jury trials have caused many courts in recent decades to limit the reach of antitrust. The result has been that some conduct harmful to consumers may be given a “free pass” under antitrust jurisprudence, not because the conduct is benign but out of a fear that the harm might be outweighed by the collateral consequences created by private enforcement. For this reason, we have seen an increasing amount of potentially anticompetitive conduct that is not easily reached under the antitrust laws, and it is more important than ever that the Commission actively consider whether it may be appropriate to exercise its full Congressional authority under Section 5.
The Commission essentially argues that because courts have limited the scope of the Sherman Act, there is a legitimate fear that the antitrust laws might not reach every bit of conduct that might harm consumers. In turn, this narrowed scope of the Sherman Act warrants an expanded use of the Section 5 authority.
Commissioner Rosch offers a more nuanced view of his preference for Section 5 (to the exclusion of Section 2) in his separate statement. Commissioner Rosch contends that Section 5 is the appropriate antitrust weapon of choice against Intel because: (1) in markets with few players, like the microprocessor market, it is tough to distinguish harm to competitors from harm to competition; (2) the reduction of consumer (whether OEM or end user) “choice” warrants antitrust action even if the that loss is not also associated with a reduction in output, increase in price, or some demonstrably measurable competitive harm; (3) “course of conduct” monopolization claims are like “invitation to collude” cases and are therefore appropriate under Section 5; and (4) because the Commissioner believes intent evidence is relevant in this case (and presumably most cases) and some cases interpreting the Sherman Act restrict its use.
These arguments fail to justify use of the Commission’s Section 5 authority in the Intel matter. Further, these arguments provide only a thin veil for what appears to be the more likely reason that the Commission is choosing to exercise its Section 5 authority against Intel – to evade the strict requirements of proof of competitive harm embedded into Section 2 of the Sherman Act.
Section 2 jurisprudence has developed in a manner consistent with the “error-cost approach” to the design of optimal legal standards and allocations of burdens. That is, the Leibowitz/Rosch narrative that the reduction in scope of Section 2 over time immunizes defendants despite their anticompetitive conduct because of some sort of aversion to private enforcement is simply wrong. Moreover, it’s wrong in an important way. The fear that emerges out of Credit Suisse, Trinko, Brooke Group, and Linkline is not merely that private actions are bad, but rather that error costs are a real, measurable problem. In other words, the fear is that: (1) it is very difficult to determine in the first instance whether would-be exclusionary conduct is pro-competitive, anti-competitive, or competitively neutral, (2) consequently, this raises the inevitability of Type I and Type II errors, (3) as per Easterbrook’s The Limits of Antitrust, the former should be of greater concern because they create more substantial social costs (”error costs”). Given (1)-(3), the Supreme Court has adopted liability rules that reflect the realities of the economic technology available to distinguish anticompetitive single firm conduct from pro-competitive conduct, and the asymmetrical costs of errors. The fundamental point is that rules that are responsive to error-cost concerns are very much concerned with maximizing the rate of return provided consumers to enforcement of antitrust laws.
While it is true that private enforcement can exacerbate the costs of false positives, and that this aggravation has partially motivated the Supreme Court’s analysis, Leibowitz /Rosch do not fit that observation into the error-cost framework that the Court has adopted. This fundamental error, and particularly the failure to understand the central role of the difficulty of identifying anticompetitive conduct and distinguishing it from pro-competitive conduct in the development of Section 2 standards, causes the Commissioners to see the strict requirements of Section 2 as raising “technical” obstacles to antitrust claims that do not go to the core of the antitrust mission --- and hence their comfortableness with the gap-filling use of Section 5.
To repeat, the fundamental problem with this approach is that the development of Section 2 in response to error-cost concerns is a feature and not a bug. Treating Supreme Court antitrust jurisprudence as a mere “bug” that can (or must) be evaded when convenient for the Commission’s policy preferences is neither a coherent nor principled approach to Section 5 in general or with respect to Intel in specific. The view implicitly adopted by the Commissioners that the antitrust laws are somehow failing if they do not reach “most anticompetitive conduct” simply contradicts the approach taken by the Supreme Court. The gap between actual Supreme Court interpretation of Section 2 and the Commission’s hypothetical body of antitrust law that would reach all anticompetitive conduct is not one that is accidental or the product of “mere technicality.” Rather, existing monopolization law has evolved in recent years largely through unanimous decisions in a manner consistent with error-cost analysis. Indeed, error-cost analysis has become a mainstream tool in antitrust jurisprudence and the economic analysis of law generally. The interpretation of Section 2 law required to justify the “gap filling” rationale for application of Section 5 to Intel’s conduct is not completely inconsistent with case law, but it also invites the application of Section 5 unhinged from the Section 2 principles entirely. This, in my view, is a wrongheaded approach that is almost certain to strip away the protections for consumers embedded in the error-cost approach incorporated into Section 2.
Commissioner Rosch’s arguments in favor of Section 5 fail for related reasons. For example, the view that Commissioner Rosch espouses – that “the oft-repeated admonition that the Sherman and Clayton Acts protect competition, not competitors, and the federal courts’ attendant disinclination to protect competitors in cases brought under those statutes do not fit well” in markets like the microprocessor industry with small numbers of competitors – implicitly rejects the notion that the “oft-repeated admonition” has consumer-welfare protecting value associated with it. As discussed briefly above and elsewhere at length, this is incorrect. The difficulty with distinguishing vigorous competition that harms competitors but benefits consumers from truly anticompetitive conduct is at the heart of error-cost analysis designed to harness the power of the antitrust laws to maximize the welfare benefits competition policy generates for consumers. If Commissioner Rosch truly believes that in markets with only one competitor, harm to that competitor renders harm to competition likely, let the plaintiff prove competitive harm under Section 2. Instead, the Commission is taking the position that in cases where it is really tough to distinguish harm to competition from harm to individual competitors, we ought to ease the plaintiff’s burden! This argument turns the first principles of antitrust on their collective head in a manner that makes the attempt to fit this particular application into the traditional uses of Section 5 quite uncomfortable.
More than anything else, Commissioner Rosch’s argument is an appeal to the European monopolization/abuse of dominant position approach that more readily equates harm to competitors with harm to competition. The fact that the US system rejects this view is neither accidental nor a mere technicality to be evaded through the novel use of Section 5. While I’ve focused here on the incompatibility of the Commission’s Section 5 case with established Supreme Court Section 2 jurisprudence, there are other major problems with the Commission’s reinvigoration of Section 5 as the touchstone of monopolization enforcement. A substantial problem with this approach is that it offers business firms virtually zero clarity with respect to forms of business conduct (including conduct involving discounting, such as Intel’s contracts with OEMs) is permissible. Of course, this problem is exacerbated by the facts that the Commission has ruled for itself in all 16 of the disputed Sherman Act cases it has brought and that the Commission’s administrative decisions are neither binding on the Commission itself nor great deference by the courts.
I’ll finish with a prediction. The FTC will ultimately lose under any elements of the case brought under Section 2. To the extent that an appropriate interpretation of Section 5 is at least informed by Section 2, the FTC will also ultimately lose on its Section 5 claims (on appeal, of course, not at the Commission). Further, the Section 5 enforcement action will cost consumers (win or lose) in at least two ways. The first is that Commission will expend significant resources litigating a case with Intel involving conduct that has already been limited by a private settlement, exploiting resources that could be used to tackle other (error-cost justified) problems. The second is that the Commission’s invocation of (and awkward justification for) Section 5 will result in uncertainty which will chill some pro-competitive conduct, including discounting behavior by firms in high-tech industries and across the economy.
But most importantly, whatever one thinks about the competitive merits of Intel’s underlying conduct, the Commission’s use of Section 5 should be seen for what it is: an attempt to evade requirements to demonstrate consumer harm under Section 2 that exist to protect consumers from the social costs of false positives. Such an approach is bound to harm competition and consumers in the long run because it gives the Commission the option to apply its “watered down” standard to whatever business conduct it views as potentially problematic. This approach is a recipe for Type I error and should be rejected by fans of consumer-welfare based antitrust policy.