Repeating claims he made in his statement in Intel, Chairman Leibowitz in a recent interview in the Wall Street Journal has this to say about stepped-up Section 5 enforcement at the FTC:

The courts have pared back plaintiffs’ rights in antitrust cases. They’re concerned about what they believe to be the toxic combination of class actions, treble damages and a very aggressive plaintiffs’ bar. The problem for us as an agency is we come under those restrictions, [too]. So how do we do what we’re supposed to do, which is stopping anticompetitive behavior? One tool in our arsenal is using what’s known as our Section 5 authority to stop unfair methods of competition.

Leibowitz further justifies his approach to Section 5 with an appeal to what he claims to be an important intrinsic limit of Section 5:

The other advantage of this authority is, because it’s not an antitrust statute, it’s going to limit follow-on, private treble-damages law suits. I think in the end, if we use this statute effectively to stop anticompetitive behavior, the business community is going to end up supporting it very, very strongly. Because what they’re most concerned about is follow-on, private, treble-damages litigation. They’re not so much concerned about cease-and-desist [orders], which is the kind of thing we’re often looking at when we use our Section 5 authority. I don’t think big business should be worried. I think they should embrace this trend.

Yes, I’m sure business will eagerly embrace the FTC’s use of this statute, particularly as the agency defends it precisely on the ground that its use is relatively unconstrained by courts and their pesky rule of law.

Leibowitz has been making these claims for some time (see, e.g., these remarks from October 2008 and the N-Data Statement).

But admittedly, if it were true that the FTC’s use of Section 5 did not lead inexorably to costly follow-on litigation, and if it were not the case that the statute were a recipe for unprincipled, uneconomic antitrust enforcement, no doubt there would be some support for it.  But unfortunately for Leibowitz, the claim is NOT true–it is not the case that Section 5 removes the specter of costly private litigation from the equation.

The reality is that many states have “Baby FTC Acts,” modeled on the federal FTC Act and taking enforcement cues–by law–from FTC interpretation of the Act.  And these statutes do provide for private rights of action and treble damages.  So although it is technically true that there is no private right of action under the federal FTC Act, this hardly shields antitrust defendants from follow-on liability.  And even if such actions have been rare up until now (as Leibowitz claims in the remarks linked above), that may well change as the FTC’s precedent-setting enforcement decisions shift toward using the statute as an antitrust enforcement tool and as the Act is used more and more for otherwise-unwinnable Sherman Act cases.

This point isn’t new, and Commissioner Kovacic made this same point in his dissent from the N-Data settlement:

The Commission overlooks how the proposed settlement could affect the application of state statutes that are modeled on the FTC Act and prohibit unfair methods of competition (“UMC”) or unfair acts or practices (“UAP”). The federal and state UMC and UAP systems do not operate in watertight compartments. As commentators have documented, the federal and state regimes are interdependent. [Citations omitted].  By statute or judicial decision, courts in many states interpret the state UMC and UDP laws in light of FTC decisions, including orders. As a consequence, such states might incorporate the theories of liability in the settlement and order proposed here into their own UMC or UAP jurisprudence. A number of states that employ this incorporation principle have authorized private parties to enforce their UMC and UAP statutes in suits that permit the court to impose treble damages for infringements.

If the Commission desires to deny the reasoning of its approach to private treble damage litigants, the proposed settlement does not necessarily do so. If the Commission’s assumption of no spillover effects is important to its decision, a rethink of the proposed settlement and order seems unavoidable.

As far as I can tell, however, Leibowitz and other defenders of this rationale for expanded Section 5 enforcement have not addressed this point, and they continue to rely, disingenuously, in my opinion, on claims that Section 5 enforcement will not lead to follow-on, private actions.

At the same time, as I pointed out here, Leibowitz’ continued claim that courts have reined in Sherman Act jurisprudence only out of concern with the incentives and procedures of private enforcement, and not out of a concern with a more substantive balancing of error costs–errors from which the FTC is not, unfortunately immune–seems ridiculous to me.  To be sure (as I said before), the procedural background matters as do the incentives to bring cases that may prove to be inefficient.

But take, for example, Twombly, mentioned by Leibowitz as one of the cases that has recently reined in Sherman Act enforcement in order to constrain over-zealous private enforcement (and thus not in a way that should apply to government enforcement).  Yes, of course, Twombly was concerned with the private incentives for bringing antitrust strike suits and the costs of such suits.  (And I note in passing that, while the specific monetary incentive at issue in the case might not apply to the government, the government, too, certainly has incentives to bring cases that may be weak–I hardly think the analysis is completely inapposite.  Meanwhile the costs of protracted litigation are just as high if the plaintiff is the government as if it is a private party.)

But the over-zealousness of private plaintiffs is not all it was about, as the Court made clear:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.  Accordingly, we have previously hedged against false inferences from identical behavior at a number of points in the trial sequence.

* * *

Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. [Citations omitted].

The Court was appropriately concerned with the ability of decision-makers to separate pro-competitive from anticompetitive conduct.  Even when the FTC brings cases, it and the court deciding the case must make these determinations.  And, while the FTC may bring fewer strike suits, it isn’t limited to challenging conduct that is simple to identify as anticompetitive.  Quite the opposite, in fact–the government has incentives to develop and bring suits proposing novel theories of anticompeitive conduct and of enforcement (as it is doing in the Intel case, for example).

I recognize that Leibowitz may believe that he is not susceptible to mistakes of this sort, or that (as Dan Crane might say), the FTC has a comparative institutional advantage over courts in making these sorts of determinations.  I disagree, but if that is the claim then Leibowitz should make it explicitly rather than suggesting that current Sherman Act jurisprudence is all about treble damages and strike suits.  I’m quite certain, however, that an explicit claim by the FTC that it never gets it wrong and thus shouldn’t be constrained by meddling courts wouldn’t be viewed very favorably by the business community.

Geoff recently highlighted AAG Christine Varney’s closing remarks at the Horizontal Merger Guidelines workshop and was fairly critical.   Thom intervened to suggest that we at TOTM, while fairly critical of the agencies from time to time, also give credit where it is due — highlighting AAG Varney’s RPM article.  OK, that’s enough credit for now.

Now, I’d like to highlight another portion of the speech Geoff mentioned that, as Commissioner Rosch has done in earlier remarks of his own, takes a shot at the Chicago School in order to justify greater intervention and a “reinvigorated” antitrust enterprise.  On the one hand, it sure is nice to see convergence between the agencies compared to the days when Commissioner Kovacic described the sister agencies as “an archipelago of policy makers with very inadequate ferry service between the islands” and “too many instances when you go to visit those islands the inhabitants come out with sticks and torches and try to chase you away.”  Ah.  Nothing like attacking a vaunted enemy of interventionist antitrust policy like the Chicago School bogeyman to create warm feelings between the agencies.   On the other hand, convergence would seem like a less impressive feat if what is converged upon is an embarrassing error that demonstrates a lack of understanding about the Chicago School in the first instance, and even still less impressive if the error is bootstrapped into justifications for policy changes.

What is all this about?  In leveraging discussion of the financial crisis as the basis of an argument that microeconomic theory that forms the basis of industrial organization economics has been turned on its head, the chiefs of both antitrust agencies have now made the same error.  I’ve criticized Commissioner’s Rosch’s error in declaring the Chicago School “on life support, if not dead” in great detail elsewhere.  Antitrust is getting a little bit depressing.  While the US enforcement agencies would have the Chicagoans on life support, or at least retired, of course, Professor Elhauge goes the whole way to “death of the single monopoly profit theorem.”  All this talk about the Chicago School’s death, retirement, general malaise and otherwise fragile state and one almost forgets the state of Supreme Court jurisprudence, much less the actual empirical evidence.

Let’s turn to AAG Varney’s statement:

The evolution of antitrust law needs to keep pace with the advancement of economic thinking. Judge Posner convincingly made this case for reassessing economic beliefs in his recent, thought-provoking piece entitled “How I Became a Keynesian: Second Thoughts in a Recession,” wherein he questioned some of the theoretical assumptions that had previously guided his work. In an even more recent interview, he is quoted to say that “‘the term “Chicago School” should be retired.’” Theoretical assumptions that market forces naturally and inevitably correct for market failures clearly need to be reconsidered. In the context of the Horizontal Merger Guidelines, the most relevant aspect of this reassessment involves explicit or implicit assumptions that entry will erode market power otherwise enhanced by a merger.

Here’s the link to the interview.  Varney clearly wants to use Posner’s quote about the retirement of the Chicago School to support the next sentence, that is, that we ought to reconsider our priors about markets working and reevaluate antitrust priorities in a way that supports greater intervention.  I mean, if Chicago’s own Richard Posner says the Chicago School should be retired — well, I leave the rest of the proof as an exercise for the reader.

So did Posner And here’s what Posner actually said:

Ronald (Coase) is alive, but he’s very, very old. He’s not active. Stigler is dead. Friedman is dead. There’s Gary (Becker) of course. But I’m not sure there’s a distinctive Chicago School anymore. Except there are probably a higher percentage of conservative people here, but not all. Jim Heckman—not particularly conservative at all. He’s very distinguished. Steve Levitt—he’s very famous. I don’t think he’s conservative. You’ve got people like (Richard) Thaler. So probably the term “Chicago School” should be retired.

There were people—people like Stigler and Coase, Harold Demsetz, Reuben Kessel, and people at other schools like Armen Alchian. They were people rebelling against the very liberal economics of the nineteen-fifties—very Keynesian, very regulatory, very aggressive anti-trust, little faith in the self-regulating nature of markets. Francis Bator, who’s a very distinguished Harvard economist, he wrote a famous essay entitled “The Anatomy of Market Failure.” And he gave so many examples of market failure that you couldn’t believe a market could exist. You have to have an infinite number of competitors, full information, you can’t have any economies of scale, and so on. It was too austere. That was what the Chicago people, with their more informal approach, rebelled against. So we had our moment in the sun, but by the nineteen-eighties the basic insights of the Chicago School had been accepted pretty much worldwide.

Posner did not make the point that the Chicago School ought to be retired because it is outdated, incorrect, or led to antitrust policy that provided inadequate protection for consumers because of misguided notions about market failures.  Posner was making the point, as he has made elsewhere time and time again, that the Chicago School as applied to regulation, antitrust, and industrial organization economics, had been so broadly adopted into mainstream economic thought that it no longer made sense to describe a distinctive “Chicago School.”  This is the point he also makes in the speech.   Posner, actually goes so far as to reject the assertion Varney invites the reader to make, i.e. that the financial crisis should undermine faith in markets in a sense relevant to regulation and antitrust generally.

When asked “Has the financial crisis undermined your faith in markets and the price system outside of the financial sector?”

Here is Judge Posner’s answer:

No. But of course one of the more significant Chicago (positions) was in favor of deregulation, based on the notion that markets are basically self-regulating. That’s fine. The mistake was to ignore externalities in banking. Everyone knew there were pollution externalities. That was fine. I don’t think we realized there were banking externalities, and that the riskiness of banking could facilitate a global financial crisis. That was a big oversight. It doesn’t make me feel any different about the deregulation of telecommunications, or oil pipelines, or what have you.

It really can’t be made more clear than that can it?  I understand that it is tempting to use figures like Greenspan and Posner to play “gotcha.”  I’m quite sure its even an effective rhetorical device at times with those who do not follow the debates closely or do not read the language carefully.  But in both cases, the AAG and the Commissioner do a disservice to those lawyers and economists in their agencies who are dedicated to getting the answer right by hard economic analysis and not by sloganeering.  For a serious and intellectually powerful discussion from a public antitrust enforcement official discussing the Chicago School’s role, along with contributions from Harvard, in forming the intellectual basis of modern antitrust jurisprudence, see Commissioner and former Chairman Kovacic’s seminal article on the subject.

As I’ve written on this topic previously:, at that time motivated by the declaration out of the Federal Trade Commission that the Chicago School was either on life support or dead:

I had always thought that the “Chicago School” stood for the proposition that microeconomic theory should be applied rigorously, with care and attention to institutional detail, and with an eye towards producing testable implications.  These are qualities, especially empiricism, that do not lend themselves to a reflexive “faith” that markets will produce only efficient behavior.  That faith, where it exists, is earned by persuasive theory and evidence.

And with all due respect to the Commissioner, an intellectually honest survey of the state of evidence concerning the actual competitive effects of antitrust-relevant business practices reveals that the Chicago School isn’t close to dead.  In fact, Chicago School principles are alive as ever in the Supreme Court’s jurisprudence.  Perhaps this disappoints the Commissioner and others who might like economics (and particularly Chicago School antitrust economics) to be a lesser constraint on antitrust enforcement decisions.  But it’s the state of play in both the federal courts and in the empirical antitrust literature.  The debate over whether to deviate from the state of play should be determined by the quality of theory and evidence.   A rigorous review of the empirical evidence suggests not only that the Chicago School of antitrust is alive, but in my view, that it is the “best available” mode of analysis for understanding many business practices relevant to antitrust enforcement.

The search for evidence-based antitrust cannot be conducted by assertion.  Instead, if it is to be fruitful, it must take a more scientific approach.

If the Chicago School’s influence on antitrust policy is going to be defeated — let it be by strong theoretical and empirical evidence that its insights give less predictive power than alternative theories and result in policies that provide fewer benefits to consumers than alternatives.  T-shirt slogans are not going to reverse Supreme Court decisions or win Section 2 cases — though perhaps acts of Congress and expanded use of Section 5 will leave a dent.  Still, here’s to authorities and leading voices in the antitrust community, and particular those at the antitrust enforcement agencies, using their podiums to encourage productive and intellectually honest debate and not cheap, deceptive, and misleading rhetorical tricks.

Speaking of, let’s have new Section 2 hearings!

Alan Meese (William and Mary) and Barak Richman (Duke), have an op-ed over at the Huffington Post on the Ticketmaster Live nation merger and settlement.  They frame the DOJ decision to approve the merger as a victory of principle over politics and economic populism.  Here is an excerpt:

Many hoped that the Live Nation-Ticketmaster merger would fall prey to a new economic populism. When the companies announced their plans to merge, some characterized the merger as a consolidation of “entertainment powerhouses” designed to inflate ticket prices and squeeze consumers. Public figures, including none other than Bruce Springsteen, condemned the combination. Members of Congress piled on, characterizing the transaction as a naked combination of industrial titans and demanding action from antitrust enforcers.

Meese and Richman go on to argue, based on their own analysis, that the merger would have been pro-competitive:

The Live Nation-Ticketmaster merger would have been another procompetitive victim to an angry public. Our careful analysis of the proposed merger reveals that it is much more a response to Schumpeterian technological change than an effort to concentrate market power. In other words, the companies are combining forces to pursue an innovative business model, one that pursues new consumer demands and responds to the rise of electronic music. It is not an attempt to acquire a stranglehold over an industry that technological change has made increasingly resistant to strangleholds.

The populist anger directed at the proposed merger — which was in no small part fueled by the companies’ smaller competitors who feared having difficulty competing effectively against the new company– characteristically did not discern the complexities of the industry and evaluate the merger’s likely competitive impact. Of course, few in Washington brake for complexity. Which is why it is a relief the Obama administration did.

I’ve not yet read the analysis, but plan on doing so soon.  In the meantime, here is how Meese & Richman close:

Even while the Obama Administration might engage in antitrust saber rattling, its approval the Live Nation-Ticketmaster and the associated consent decree shows the triumph of economic reasoning that is often counterintuitive to policy advocates. Its settlement further extracts concessions that further enhances competition, promotes innovation, and protects consumers. It is the commendable product of careful analysis reflects a deliberate navigation across the minefield of antitrust politicization.

I’m left with two questions.

The first, which I hinted at here, is that the combination of the structural fix coupled with the non-retaliation provisions strikes me as somewhat odd.  If the structural fixes restore competition, then why the need for restricting vertical contractual arrangements as between Ticketmaster and venue owners/ customers?  Here is DOJ Competitive Impact Statement.  Meese and Richman describe the settlement as extracting concessions that are pro-competitive and the product of careful analysis.  I agree with the authors that refusing to succumb to economic populism when the data and analysis go the other direction is a victory for rigorous antitrust analysis.  But I’m not yet convinced that the conditions are to be celebrated.  So, I wonder what the authors mean when they say the  concessions are pro-competitive, and in particular, whether the conduct fix can be said to be pro-competitive if the structural fix restores any perceived competition problem?  Or is the DOJ just hedging?

The second is a rhetorical question: I wonder whether Intel feels like despite the Obama administration’s “saber rattling,” they can rest assured that the invocation of Section 5 is a sign that economic reasoning will triumph over populism and politicization?

Tomorrow I will be presenting my paper, A Decision-Theoretic Rule of Reason for Minimum Resale Price Maintenance, at the Next Generation of Antitrust Scholarship Conference at NYU Law School. (Kudos to Danny Sokol for co-organizing what promises to be a terrific event!) My paper criticizes four proposed approaches to evaluating RPM post-Leegin, and it sets forth an alternative approach that embodies the sort of error cost analysis Geoff and Josh have embraced in connection with monopolization doctrine. The paper largely builds on my recent William & Mary Law Review article on RPM, expanding the analysis to address recent developments in the caselaw and antitrust scholarship (e.g., I address the pending Babies-R-Us case).

In preparing for the conference, I checked Westlaw to see who (if anyone!) had cited my William & Mary article, and lo and behold, I came across a piece on post-Leegin RPM analysis by Christine Varney herself. Well guess what? It’s really quite good. We here at TOTM have occasionally been critical of Ms. Varney’s interventionist stances on antitrust (most recently here), but we must give credit where credit is due. And Ms. Varney’s article, A Post-Leegin Approach to Resale Price Maintenance Using a Structured Rule of Reason, is creditworthy.

As I do in both my William & Mary article and the paper I’m presenting tomorrow, Ms. Varney argues that plaintiffs challenging instances of RPM should bear the burden of proving that the preconditions for at least one of the theories of RPM-induced anticompetitive harm are satisfied. That may sound like a no-brainer, but it’s signficantly more stringent than any of the other liability rules courts, commentators, and regulators have thus far proposed.

The American Antitrust Institute and the attorneys general of 27 states, for example, would presume the illegality of any instance of RPM that raises consumer prices. That’s ridiculous, of course, for even RPM’s procompetitive potential stems from the fact that it generates output-enhancing services by raising prices and thereby enhancing retailer margins (and retailers’ incentives to promote the brand at issue).

The Babies-R-Us court, following the proposal of economists F.M. Scherer and William Comanor, deems any retailer-initiated RPM to be illegal. That’s troubling because, as I explained in this post, retailers have an incentive (and are particularly well-poised) to seek RPM for procompetitive purposes like avoiding free-riding. Retailer initiation is entirely consistent with procompetitive motivation (and effect), but it’s enough to render RPM per se illegal under the Babies-R-Us approach.

The Areeda treatise would deem illegal any RPM imposed on a homogeneous product that is not sold with services susceptible to free-riding. That’s too restrictive because, as I explain here (and as Josh has explained in a number of articles and posts), RPM has procompetitive uses besides the avoidance of free-riding. Most notably, it can act as an efficient mechanism for inducing dealers to promote a particular brand of even a homogeneous product. Thus, it may be output-enhancing even when applied to products that aren’t sold along with “free-rideable” point of sale services.

Finally, the FTC has taken the position (in deciding Nine West’s motion petition to modify an injunction) that RPM should be presumptively illegal unless the defendant makes a number of difficult showings. That’s inappropriate because theory and evidence suggest that most instances of RPM are procompetitive, and the RPM challenger therefore ought to bear the initial burden of proof.

Compared to these four proposed approaches, Ms. Varney’s proposed approach is a breath of fresh air. It correctly recognizes that anticompetitive uses of RPM are difficult to accomplish, and it properly places the initial burden on an RPM challenger to show that the preconditions for anticompetitive harm exist. (The defendant would then have a rebuttal opportunity, which is proper.) The showings necessary to state a prima facie case of illegality are quite difficult, but that’s entirely appropriate, given that most instances of RPM are procompetitive.

Ms. Varney’s article appears in the Fall 2009 issue of the ABA’s Antitrust Magazine and is available on Westlaw.

Yesterday, in my contribution to the Antitrust & Competition Policy Blog’s Section 5 symposium, I discussed the FTC’s use of Section 5 to evade the tough standards facing plaintiffs bringing Section 2 claims and how that evasion was likely to cost consumers by stripping out the error-cost protections embedded in modern monopolization law.  I also argued that the Commission’s various justifications for bringing the case under Section 5 were both unpersuasive and unprincipled.  Some of the justifications are to do with the general trend towards favoring Section 5 as a stand alone authority, others rely on the institutional expertise of the Commission relative to judges in federal district court, and still others on the nature of competition in the microprocessor market, e.g. Commissioner Rosch’s claim that the difficulty in distinguishing harm to competitors from harm to competition in this setting supports a Section 5 case.

These purported justifications got me thinking.  There are competing theories of the Commission’s reliance on Section 5.  One is that the choice of statute is driven by dissatisfaction with the error cost protections afforded consumers by demanding rigorous proof of consumer harm under Section 2, the appeal of the evading those requirements, and the various procedural benefits of keeping things “in house.”  The other school of thought is that the Commission, in cases like Intel, is taking a principled approach wherein some features of the Intel case (as Commissioner Rosch argues)  favor application of Section 5.  I’ve already tipped my hand here somewhat that I think the proffered justifications don’t carry much water.  But what would be really nice support for the Commission’s argument is that in similar cases involving vigorous competition between a dominant player and challenging incumbent, involving the same sort of loyalty discounts and market share discounts as the contracts forming the basis of the Intel complaint, the Commission invoked Section 5 on similar reasoning.

So when else has the Commission, faced with business practices involving aggressive competition for distribution, including market share discounts, turned to a less stringent statutory authority than Section 2?

FTC v. McCormick. The similarities between McCormick and Intel are interesting.  Both involve competition for distribution.  Both suppliers arguably have monopoly power in plausible relevant antitrust markets.  Further, the conduct in each case involves  “market share discounts,” or contracts that conditioned the granting of discounts on retail distributors agreeing to commit high percentages of their shelf space to McCormick spice products.  In McCormick’s case, in response to a vigorous price war with its leading rival Burns, McCormick offered significant discounts to its retailers in exchange for shelf space commitments approaching 90 percent in some cases.  Like Intel, the contracts at issue appear to be just a small fraction of the total market.  In McCormick, for example, out of 2000 or so contracts with retailers, the Commission focused on a handful: “in no fewer than five instances . .. by providing different deal rates consisting of preferential upfront ‘slotting’-type payments or allowances, discounts, rebates, deductions, free goods, or other financial benefits to some purchasers of McCormick products including, but not limited to, McCormick’s spice line.”   The FTC’s Complaint against McCormick, like the Complaint against Intel, reads like a conventional monopolization claim:

McCormick has commonly included provisions that, much as is sometimes seen with slotting allowances, restrict the ability of customers to deal in the products of competing spice suppliers. Such provisions typically demand that the customer allocate the large majority of the space devoted to spice products – in some case 90% of all shelf space devoted to packaged spices, herbs, seasonings and flavorings of the kinds offered by McCormick – to McCormick.

So what did the Commission do in McCormick?  Did it bring the case under Section 2?  Section 5?  Or even under a primary-line Robinson-Patman Act claim that would have also required the Commission to meet the stringent Brooke Group requirements?  Nope.  Instead, over the dissent of two Commissioners, McCormick ultimately agreed to a consent order with the FTC preventing its use of discriminatory prices between retailers, i.e. secondary-line injury under the Robinson-Patman Act which required no actual showing of loss of consumer welfare.

In my paper on Antitrust Law and Competition for Distribution, I criticized the FTC for bringing (and extracting the settlement) McCormick under the discredited Robinson-Patman Act at all, but even more worthy of criticism was the decision to evade the traditional consumer welfare standards in favor of the secondary-line injury theory which required no such proof:

The availability of the Act’s weaker standard suggests a backdoor for plaintiffs unable to meet the more stringent burden of proving competitive injury in a monopolization or primary-line claim. While it is doubtful that the FTC’s prosecution of McCormick represents a revitalization of the Act, the prosecution does create uncertainty for manufacturers in the growing number of industries relying on retailer promotional effort and product placement for sales.

Sound familiar?  Here is what I wrote about the Commission’s more recent invocation of a weaker substantive standard when it is unlikely to prevail under Section 2:

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.

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.

The justifications offered for bringing McCormick under the Robinson-Patman Act, like the justifications offered for bringing Intel under Section 5, are not persuasive.  And in my view, the fact that the FTC brought claims in these two cases involving very similar conduct under two different statutes over a ten year span suggests to me that the Commission does not have a coherent analytical theory of its approach to competition for distribution cases.  So why the RP Act in McCormick and Section 5 in Intel?  My suspicion is that on the one hand the current debate surrounding the appropriate scope of Section 5 had the Commission looking for a good, high profile case to test its Section 5 authority, write an “expert” Commission opinion on the subject and attempt to persuade the federal court of appeals that eventually hears the case about the right approach to loyalty discounts under Section 2 and 5.  On the other hand, the Robinson-Patman Act has only become increasingly discredited since McCormick in 2000 with the AMC repeal recommendation.  But I remain unpersuaded that the Commission’s choice to bring the case under its Section 5 authority is a principled one.

To borrow and put a twist a line from Justice Potter Stewart, the only consistency I can find in the Commission’s approach to competition for distribution and market share discounts is that it chooses to avoid Section 2!

As Josh noted in cross-posting his comment on Section 5 and Intel, Antitrust & Competition Policy Blog is hosting a symposium on the role of FTC Act Section 5 in light of Intel.  Josh’s contribution at AC&P is available here, along with the other symposium participants.  I, too, have contributed a post, likewise cross-posted here.  At the end of my post (below) I also add a comment on Dan Crane’s post at AC&P–I tried to post it there but seem to have failed miserably.

The FTC should be ashamed

Seriously.  What interpretation of events is there other than that the FTC knew it could not prevail in a Section 2 case and decided to go in search of a back-up?  Commissioners Rosch and Leibowitz have been making noise about Section 5 for some time, and this seemed like the perfect opportunity to put it to the test—to make some new law that would favor the Commission in cases like this one where it “knows” there is injury but the Section 2 case law makes prevailing difficult nonetheless.  They have “found” their case, and Intel, its shareholders, consumers and competition generally will suffer mightily for their hubris.

Chairman Leibowitz’ defense of the use of Section 5 is, quite frankly, astonishingly disingenuous.  First is the implicit defense I mention above—“hey, we can’t win under settled law [I guess repudiating the Section 2 Report just wasn’t enough. Bummer.-ed.] so let’s make some new law.  We are doing good after all, and if the law stands in our way, we should find a way around.”  Commissioner Rosch has made similar noises in the past.  I find this degree of hubris to be appalling and dangerous.

Second is the remarkable claim that Section 2 is a problem only because courts have taken its teeth away only because of abusive private litigation process—and the FTC is not susceptible to those process problems, so an emasculated Section 2 should not constrain the FTC.  There is so much wrong with this.  Section 2 jurisprudence and a concern for error costs is about substantive error as well as procedural imbalance; I’d even say it is more about the former.  Read any Section 2 case and the entirety of the decision (Microsoft, for example) is about how, as a matter of substance, we can be sure we’re getting it right in assessing speculative harms.  Of course there is a background procedural element that tips or rights the scales, but the claim that this is entirely what Section 2 jurisprudence is about is ridiculous on its face.  For the FTC to claim that it should not be bound by the substantive, economically-sensible limits of antitrust that courts have developed in their jurisprudence is for the FTC to claim that it is simply above the law—and the economics.  And I would be interested in seeing any case-law precedent for the claim that Section 2 jurisprudence is all about reining in private litigation and not about getting the economics right.

We’ve seen this kind of hubris before—when antitrust enforcers have pursued tenuous and costly cases despite massive uncertainty and copious conflicting evidence:  IBM and Microsoft come to mind.  I still relish Larry Lessig’s admission that he “blew it on Microsoft” because he couldn’t anticipate the future—a future that Microsoft told him and the court was inevitable and coming quickly.  Now we have Commissioner Rosch’s essentially-unmoored reading of Section 5 to support another speculative case—this time one almost certain otherwise to fail under the current law.  It is a disaster in the making not only for Intel but for the economy generally if the Rosch/Leibowitz reading of and approach to Section 5 takes off.

___

My comment on Dan Crane’s post responds to his claim that there is, in fact, a role for Section 5 “independence” rooted in the FTC’s institutional comparative advantage in certain areas over that of private litigants.  Dan writes:

In my forthcoming white paper, I articulate principles–based in the Commission’s comparative institutional advantages–for when it should and should not declare Section 5 independence. To give just one example here, much of the case law on Section 5 suggests that the Commission may have prophylactic powers in cases of incipient conduct.

Perhaps this is because the Commission is better than the courts at predicting likely effects of emerging market forces. But such a justification cannot possibly serve in Intel, since the conduct at issue has been in play for over a decade.

In short, while I strongly support separating Section 5 from the Sherman Act, great care has to be taken to pick the right cases for making the arguments. Intel–a high-profile case with punitive and drastic proposed remedies entailing conduct paradigmatically covered by the Sherman Act–is the wrong case.

My response:

Dan:  I’m torn. I agree with your criticisms of Leibowitz’s and Rosch’s lame justifications for use of Section 5 in this case, but I disagree that there is really any strong justification for the public/private separation you advocate (I’ll await your article for more extensive comment . . . ). But you mention the possibility (for other cases, not here) that the FTC could be better than the courts at predicting emerging market forces. In the first place, I’m curious why you think that or what evidence you have to support the claim. But more important, even if true, why isn’t it perfectly applicable here? Who cares that the conduct has been going on for a decade? Today there are “emerging market forces” that may or may not have existed the last 10 years. By your own claim, the FTC may be better at anticipating these. Just because the conduct has been going on for 10 years does not mean that the market conditions have remained the same, and today is a new day with new emerging market forces. Thus, it seems to me, if you want to claim that the FTC’s alleged better ability to predict emerging market forces justifies use of Section 5, you are providing justification for this use of Section 5.

Economist, co-author, and sometimes TOTM guest David Evans (UCL, University of Chicago School of Law) has an excellent note on “Why Now is Not the Right Time To Revamp Consumer Protection,” based on remarks made at the New York Federal Reserve Board-New York University Conference on Regulating Consumer Financial Products yesterday in New York.  Evans makes some of the points we discuss in our joint work criticizing the intellectual basis for the Consumer Financial Protection Agency, but also offers a concise and powerful case against “revamping” consumer protection too hastily, or without attention to the institutional details or the economic evidence.  Geoff’s post the other day on credit card regulation, for example, points out precisely the types of harmful errors that can be made on “behalf” of consumers when invoking the behavioral economics literature without analyzing it (or the related empirical evidence) closely. Evans makes six essential points — and I’m excerpting here — but I suggest readers check out the whole thing:

First, the Treasury Department proposed a sweeping overhaul of consumer protection for financial services for the wrong reasons. It is widely reported that the Administration pushed consumer financial protection legislation because they thought it would be the “locomotive that would drive financial reform.” The idea is that the folks back home couldn’t get why their representatives would be working on obscure things like clearing houses for credit default swaps. But they could connect with plain old consumer protection. Hey, who wouldn’t want to be protected? Since we’re not in DC perhaps I won’t be laughed out of the room for saying this is pretty cynical.

Second, Treasury wrapped consumer protection in the flag of the financial crisis. Yet there is no credible evidence that failures in the current system were a significant factor in causing the financial crisis. Many of the consumer protection problems that people point to are mainly the result of our collective delusion—the madness of the crowds—that housing prices would go up forever. There are numerous accounts of the causes of the financial crisis from varying ideological perspectives. Not one of them that I know of blames the financial crisis on failed consumer protection.

Third, instead of being the locomotive for financial reform, consumer protection has deflected attention from problems that really were at the heart of the financial crisis. Remarkably, the Administration proposed no significant reforms of Fannie and Freddie. The Administration came forward with nothing on dealing with the credit rating agencies. There’s widespread support among economists for introducing competition into that business… .

Fourth, the Treasury Department and Congress have proposed this sweeping overhaul of the lending industry at just about the worst possible time. A massive credit crunch is holding back the economy. New businesses that drive most of the job growth in the economy can’t get loans. Small businesses have had their credit lines slashed. Consumers who need to borrow money can’t. Now is the time to focus on policies to encourage lending. It is not the time to impose a new layer of regulations and costs that will make it more expensive and legally risky for financial institutions to lend money to people and businesses who want to borrow it….

Fifth, instead of dealing with financial reform and getting ourselves out of the economic crisis it looks like a lot of energy is going to be spent on the CFPA bill. So let’s talk about the merits of the proposals. The CFPA is the brainchild of several law professors including Professor Warren who spoke at lunchtime. If you look at the articles that they have written you will see that the proposed CFPA is based on three propositions …. .

Here’s my sixth and final point. If we are going to have a single consumer financial protection agency I would give it to the Federal Trade Commission. They are a well run government agency, have significant expertise in consumer protection, and have first-rate economists….

On the reliance on behavioral law and economics providing the intellectual foundation for the CFPA, Evans notes:

I’m a fan of behavioral economics. However, much of the work that proponents of the CFPA rely on is based on studies that find that consumers are shortsighted in a particular technical sense known as hyperbolic discounting. Recent work has found that those studies confused shortsightedness with risk aversion. People act in ways that seem impulsive and shortsighted mainly, it seems, because bird in hand is better than two in bush. As a result I don’t believe we have a sound basis at least at this time for moving from regulations that are based on market failures in the provision of information (the intellectual basis for the current system) to market failures based on people making systematically stupid or shortsighted decisions (the intellectual basis for the new regime). The behavioral economics field has produced a rich and interesting theoretical and empirical literature. One should exercise caution, however, in unleashing these “new products” on the American consumer before they are more fully tested and vetted.

And consider the following fun anecdotal account of precisely the problems with authorizing (or requiring) a federal agency to design credit card products on the assumption that regulators are better situated than consumers to make these decisions:

Professor Warren’s lunchtime discussion of her venture into developing a new credit card deserves some mention here. As I understood it she and her colleagues had developed a “clean card”—one that did not have any fees besides an annual fee an APR—and at least got some banks excited about considering it. They soon learned that banks couldn’t introduce the card profitably. She also mentioned that Citi had introduced a more “consumer friendly” card and gotten a lot of great PR out of it. They eventually pulled it from the market because few consumers wanted it. So Professor Warren sees a problem. Banks can’t make money from a “good card” (I think that her explanation is that one bank can’t unless others also offer it) and consumers won’t take a “good card” (I think the story her goes back to our mental deficiencies). So regulation is needed. I find this very worrisome. I don’t believe that even extremely smart and well-intentioned people such as Professor Warren should be put in the position of telling—or prodding—businesses to offer products they don’t want to offer to consumers who don’t want to take them. The CFPA Act put forward by the Administration was set up to do just that.

If you are looking for a short and concise statement of the case against the consumer protection revolution, this is it.

Antitrust & Competition Policy Blog is hosting a symposium on The Role of FTC Act Section 5 in Light of Intel.  Today’s contributions include Dan Crane (Michigan), Keith Hylton (BU), Bob Lande (Baltimore) and me.   Up tomorrow will be TOTM’s Geoff Manne, Sean Heather (US Chamber), and Herbert Hovenkamp (Iowa).  My contribution is available here, along with the other symposium participants, and reproduced below the fold.  Please leave comments over at the AC&P Blog.

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Leading antitrust critic and abolitionist, Dominick Armentano, has a letter to the editor in the WSJ.  The point of the letter to the editor is rather specific: that FTC’s attack on Intel is no outlier in the historical context of antitrust enforcement, contrary to the WSJ’s description.  To the contrary, Armentano argues that Intel is just another in a long line of misguided enforcement actions.   Here’s the letter:

Your editorial is correct to condemn the Federal Trade Commission’s attack on Intel (”The 100 Years Chip War,” Dec. 18), but it is dead wrong to conclude that the government’s antitrust intervention is “unprecedented” or that antitrust laws really “exist to promote business and price competition.”

Have we forgotten the FTC’s eight-year (1958-1966) campaign against the Borden Co. to stamp out lower prices for evaporated milk? Or its 10-year (1957-1967) legal assault to end the Procter & Gample-Clorox merger in which the FTC’s primary argument against the consolidation was that the probable “economies and efficiencies” of the merger could be passed along to consumers?  Or how about the Justice Department’s 15-year (1953-1968) war against United Shoe Machinery in which United was ultimately ordered to create a competitor with divested shoe machinery assets, license out all of its own patents to the competitor, and then refrain from active competition with the new-born company for five years?

And have we already forgotten that the Microsoft antitrust debacle started with a two-year investigation by the FTC back in 1990 or that the Justice Department pursued the company for another 10 years because Microsoft bundled its Web browser, Explorer, with its Windows operating system, much to the delight of willing buyers. Recall that in the 1999 trial verdict, lower court Judge Thomas Penfield Jackson even ordered the company divested until the D.C. Circuit Court of Appeals unceremoniously discarded that absurdity in 2001. In short, the FTC’s assault on Intel is hardly unprecedented.

What these cases (and hundreds of others) establish beyond any reasonable doubt is that antitrust does not exist to promote business and price competition. Never has, never will. The theoretical and case evidence, some of which I’ve cited, is all the other way.

The real mystery surrounding antitrust is why knowledgeable observers of the free-market process persist in believing this fairy tale.

I’m already on the record as publicly criticizing the FTC’s Intel complaint.  And to the extent the letter makes the general point that the past and present of monopolization enforcement is riddled with false positives and rent-seeking that dissipate any theoretically plausible efficiency gains, I’m on board.  But more generally, I was reminded by the letter of the antitrust abolition argument raised by Armentano and others (generally from Austrian or public choice traditions).  While I’m generally sympathetic to Armentano’s views  in so far as they express skepticism about the welfare benefits of antitrust enforcement, I do not favor the abolition of antitrust and never have.  I should note that I am especially sympathetic to the skeptical view with respect to Section 2 enforcement.  As an antitrust economist who has been highly critical of government intervention in his scholarship — particularly with respect to monopolization rather than cartel and merger enforcement — and who has been described as a “Chicago School apologist” by a sitting Federal Trade Commissioner, I’ve certainly been criticized by those favoring a “reinvigorated” antitrust regime for supporting a reduction in the scope of antitrust laws and a humble and cautious approach to their enforcement.  On the other side, I’ve also frequentlybeen asked why, if I take such a critical view, don’t I support the abolitionist position of Armentano and others who share his views (and criticized by them, see, e.g. the comments to this post)?  Indeed, I might even self-indulgently describe myself as one of the “knowledgeable observers of the free-market process” to whom Armentano ascribes a mysterious and persistent belief in fairy tales.

So why don’t I believe in abolishing antitrust in toto?  The last time the issue came up on the blog was in response to a similar question raised by my George Mason colleague Bryan Caplan (in regard to the new proposed law in Hong Kong).  In that post Bryan asserted:

Even if you’re a mainstream economist who thinks my general critique of antitrust is overblown, you should still grant that for Hong Kong, I’m right. And doesn’t the fact that Hong Kong’s made it this far without antitrust give you a moment’s pause about the domestic benefits of these laws?

My position then is my position now:

Bryan has overestimated the case in favor of abolition, or at least should take a more nuanced stance. In evaluating the social benefits and costs of antitrust enforcement (including rent-seeking, error and administrative costs) I think one really has to distinguish between cartel enforcement, mergers, and monopolization. The evidence that antitrust can generate net benefits in the first category is much stronger than that it is for either mergers or monopolization. Reasonable minds can differ about the state of evidence in those latter categories, as well as whether “real” antitrust enforcement in those categories results in social costs that swamp potential benefits.

Lets just take cartels as an example.  It would be tough to argue, based on the evidence, that there is enough there to support abolition of cartel prosecution.  And cartel prosecution is a substantial part of the modern competition policy landscape.  Nor do I believe that the fact that Hong Kong is a small open economy or that it has gone a long time without antitrust means that cartel prevention is ineffective in the U.S. or cannot be in Hong Kong.  This is not an optimistic or utopian view of antitrust.  I don’t think I’ve ever been accused of that.  I’m written quite skeptically about enforcement in the single firm conduct area and how little we know in these areas should inform our policy.  One can argue that in practice, cartel enforcement really amounts to consumer welfare decreasing activity by overzealous regulators. But thats an empirical question. And I think the evidence pretty strongly suggests that cartel enforcement is good for consumers. The evidence with respect to mergers is a mixed bag and there is no general consensus. The picture is much more bleak with respect to single firm conduct, where not much is known and there is very little empirical evidence to suggest that antitrust enforcement is producing the types of outcomes that would justify the social costs of enforcing and administering those laws.

Bottom line: the position for abolishing antitrust, if we are are basing this on the current state of theory and evidence, is weakest against cartels, uncertain with respect to mergers, and much stronger for single firm conduct.

The interventionists argument that is in theory, since monopolization can result in the same effects as cartels, it doesn’t make sense to prohibit one instead of the other.  Similarly, since a horizontal merger can be a substitute for a cartel agreement, it probably doesn’t make sense to have a cartel prohibition without merger law.  All this is true in theory.  But it does not necessarily follow that these theoretical connections justify adopting the entire antitrust machinery if the welfare losses from merger and monopolization policy exceed the gains from cartel enforcement (including administrative and error costs).  One can argue about the relative magnitudes of those values in theory.  And please note that nothing in such a hypothetical position would require one to believe that anticompetitive conduct doesn’t exist.  But my position is an evidence-based one.   Cartel enforcement, in my view, has largely proven its social value.  But I’m quite skeptical that the technology available to distinguish “single firm” conduct from its anti-competitive counterpart renders Section 2 a consumer-welfare increasing proposition.   In the meantime, in my opinion, the abolitionists’ refusal to confront the qualitative and quantitative evidence supporting the effects of cartel enforcement undermines their case generally, and shifts attention away from the much stronger case against monopolization enforcement.

Statements from Nominees Brill and Ramirez, respectively, from the December 15th hearings.

There will be much to say about the Federal Trade Commission’s Intel complaint in the coming months.  And we’ve said quite a bit already.  But having just read the complaint and the statements from Chairman Leibowitz and Commissioner Rosch discussing the various rationales for making Section 5 the primary hook for this case, I wanted to share two thoughts about defenses for the move that appear in those statements.

The first comes from the joint statement:

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.

Is dissatisfaction with the current state of Section 2 jurisprudence a good enough reason to warrant application of Section 5?  That’s a tricky question.   That Section 5 might apply in some situations where Section 2 does not is a perfectly reasonable proposition.  But I have a few problems with the use of this rationale here.  One is that the the Leibowitz/ Rosch story that the reduction in scope of Section 2 has nothing to do with whether conduct is anticompetitive but rather that it is all about immunizing conduct that is known to be harmful because of some sort of aversion to private enforcement is simply wrong.  And 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 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) this raises the inevitability of Type I and Type II errors, (3) a la Easterbrook, 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.

In sum, the changes in Section 2 law have not been merely out of fear of private enforcement–but rather out of fear that private enforcement in the face of Type I errors render those errors much more serious.  But make no mistake–the error cost approach is one that is concerned precisely with adopting liability rules that maximize consumer welfare.  To say otherwise is a poor description of the case law and the underlying logic.  The view implicitly adopted by the Commissioners that the antitrust laws are 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 a hypothetical body of antitrust law that would reach all anticompetitive conduct is not one that is accidental or the product of “mere technicality.”  This is a conscious choice by the Supreme Court, based on error cost considerations that are well accepted and mainstream antitrust analysis.  This use of Section 5 cannot be said to be “gap filling.”  Instead, this invites 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.  Thus, my view is that arguments that one does not like Trinko or Credit Suisse cannot and should not militate in favor of a broader scope for Section 5.

By the way, it is also worth noting that there is a striking tension between the expressed view that fear of private litigation warrants a shift toward Section 5 and the Commission’s apparent willingness to file a complaint with regard to conduct involving Nvidia for which it has not yet taken discovery.  In other words, Commissioner Rosch argues that the Commission should pursue the Intel complaint under Section 5 alone because it will avoid the social costs associated with follow-on private enforcement but should also reserve the right to proceed as if the Commission itself were a private plaintiff filing a complaint without discovery and surely without knowing whether the allegations over which it has no facts are indeed in the public interest.

Second, Commissioner Rosch’s separate statement makes a similar error in one of the four factors he argues militates in favor of Section 5 over Section 2.  Specifically, Commissioner Rosch asserts that Section 5 as a stand alone violation makes more sense when harm to competition is difficult to distinguish from harm to competitors:

Under those unique circumstances, 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. If the firm with monopoly or near-monopoly power (here, allegedly Intel) engages in an exclusionary and unjustifiable course of conduct that hurts its only competitor in the CPU markets (here, allegedly AMD) or its only two competitors in the computer graphics product markets (here, allegedly AMD and Nvidia), given the uncommonly high entry barriers, that exclusionary conduct harms competition too, by inhibiting those rivals from constraining the exercise of monopoly power.

Again, Commissioner Rosch implicitly adopts the view that there is no “consumer welfare” based content to the old admonition about protecting competition rather than consumers.  More generally, however, the argument just doesn’t make economic sense.  If what Rosch means is that in markets with only one competitor harm to that competitor is more likely to lead to harm to competition (or is even synonymous with harm to competition), then that makes Section 2 more appropriate!  In other words, in such cases there will always be harm to competition so there is no need to expand Section 5 to reach the conduct.  Instead, Commissioner Rosch apparently is arguing that plaintiffs should be able to avoid the rigorous proof standards of Section 2 in cases where it is really hard to distinguish harm to individual competitors generated from vigorous competition from harm to the competitive process.  This turns antitrust on its head.  It is not gap-filling. And it is not merely extending Section 5 to situations of anti-competitive conduct known to be outside the scope of Section 2.

Rather, and this is the important part, this is the use of Section 5 to evade the protections afforded consumers by Section 2.  One of those, and perhaps the most important, is that plaintiffs be forced to demonstrate that (given the lack of empirical support for many of the vertical exclusionary theories in the literature) the conduct at issue has actually harmed consumers.  Using Section 5 to evade this fundamental feature of Section 2 may make the litigation easier to win, but it certainly doesn’t make it in the public interest.  The fact that in duopolies it might be more difficult to show competitive harm is no excuse to lighten the plaintiff’s burden by throwing Section 2 out in favor of Section 5.  Commissioner Rosch seems to be adopting the position that in competition in markets with few firms, we can presume that harm to competitors is a sufficient condition for harm to competition.

This is the European approach.   At best.  Despite attempts to suggest there is nothing to see here, there really is.  This is not a subtle shift in single firm antitrust jurisprudence.   This is a debate over whether the error  cost protections in Section 2 law are features or bugs, with the Commission taking the (indefensible) latter view.

Note that in May 2009 I wrote the following:

I’m quoted in the WSJ as saying that I believe it is much more likely that the US gets involved in the Intel litigation than was the case two weeks ago.  Its hard to avoid that conclusion after reading the combination of statements from the FTC on the repudiation of the Section 2 Report, the new life of Section 5, as well as the competitive pressures placed on that agency from the DOJ’s new agenda and the EU fines.

The problem is that the content of the Section 2 Report was not just policy statements from the Bush administration political appointees about what the Section 2 should be.  It was a serious project with engagement from DOJ and FTC appointees, staffers, the academic community, and business representatives to summarize the existing law and existing evidence as well as generate some guidance on best practices where available.  Turns out that with two years to work on the project and that breadth of resources and diversity of viewpoints, the Section 2 Report really does accurately state the law with respect to exclusive dealing, predatory pricing, loyalty rebates, and such.  And that law isn’t going anywhere.  Perhaps the mission of the new DOJ and FTC will be to change the law?  Or perhaps the FTC will avoid the unfavorable Section 2 law by substituting Section 5 for cases like Intel where they are unlikely to win under a Section 2 theory.  But the Supreme Court and the federal case law under Section 2 remain substantial obstacles to convergence that extends beyond the hallways of the agencies.

So far so good.  I’ll stick to my guns.  The FTC will lose under any elements of the case brought under Section 2.  To the extent that an appropriate interpretation of the requirements of Section 5 are at least informed by the requirements of Section 2, I think the FTC will also ultimately lose on its Section 5 claims (on appeal, of course).  But the Section 5 case is obviously much harder to predict.  Two things are certain.  The FTC will expend millions of dollars in resources litigating this case with Intel.  Some pro-competitive conduct will be chilled as a result of the action.  Taken in light of traditional market performance indicators like price and output in the microprocessor market, as well as AMD’s financial performance during the time period of the alleged misconduct, today’s announcement is neither a bright day for the FTC, nor consumers.

The FTC brought its long-awaited case against Intel today.  New York Times report here.  Of course we’ve covered the various antitrust claims against Intel at great length on this blog, and have found all of the theories wanting.

Chairman Leibowitz’ statement is here.  Most notable at first glance is that this is being brought primarily as a Section 5 case.  Which makes sense–the FTC probably couldn’t win a case under current Section 2 law, and given Section 5’s remarkable lack of definition or limitation, it presents a far better lever.

I was glad to see Commissioner Rosch in his concurring statement arguing for some limits to Section 5–although I’m confident he and I would disagree vehemently about where those limits lie.

Should be interesting . . .

The Searle Center Civil Justice Institute has announced the release of its preliminary report on State Consumer Protection Acts: An Empirical Investigation of Private Litigation.   You can read the Executive Summary here.  As the Searle Center State Consumer Protection Acts Task Force Chair, I’ve been involved in the data collection, analysis, and drafting of this project over the last couple of years along with the rest of the Task Force  (the Searle Center’s Executive Director Henry Butler, Jason Johnston (Penn), Jeffrey Jarosh, and Samantha Zyontz) and really is the product of a team effort including the Task Force, Searle Center research assistants (Micah Hughes, Jonathan Hillel, Matthew Sibery, Hayley Smith, and Judd Stone) and Research Coordinator Elise Nelson.   I’m incredibly grateful to have worked with such a skilled group.  This preliminary report is the first research project released growing out of a larger research agenda on state consumer protection regulation.  Some exciting projects are to follow.   Stay tuned.  For now, here are a few of the report’s key findings (consult the report for greater detail):

• Litigation under CPAs has increased dramatically since 2000: Between 2000 and 2007 the number of CPA decisions reported in federal district and state appellate courts increased by 119%. This large increase in CPA litigation far exceeds increases in tort litigation as well as overall litigation during the same period.

• Vague statutory definitions of prohibited conduct are a major driver of CPA litigation: Whether a CPA statute has vague language prohibiting some general type of conduct rather than a specific list of illegal actions is an important potential contributor to the level of CPA litigation in the state. States with vague definitions of prohibited conduct have more CPA litigation.

• CPAs are becoming more favorable and generous to consumer litigants: Between 1995 and 2007, the expected value of recovery for potential plaintiffs increased dramatically as measured by CPA requirements to bring a cause of action and available remedies. In 2004, the state CPAs that were the most favorable to plaintiffs were New Hampshire, Massachusetts, and Connecticut. The states with CPAs that were the least favorable to plaintiffs were Colorado, Maryland, and Georgia.

• States with CPAs that are more favorable to consumers have more CPA litigation: The expected value of recovery under a given state’s CPA appears to contribute to the amount of litigation that makes use of the act. States that allow more generous remedies and make it easier for consumers to win in court see more CPA litigation.

• Most CPA claims would not constitute illegal conduct under FTC consumer protection standards. The Searle Shadow FTC found that 78% of a sample of CPA claims would not constitute legally unfair or deceptive conduct under FTC policy statements. While relatively few CPA claims would constitute illegal conduct under the FTC standard (22%), even fewer (12%) would result in FTC enforcement.

• Almost 40% of CPA claims where the consumer plaintiff prevailed at trial would not constitute illegal conduct under FTC consumer protection standards: In a sample of CPA claims where the consumer plaintiff prevailed in court, the Searle Shadow FTC found that 38% of these successful claims would not constitute illegal conduct under the FTC standard. Although most of these successful cases would meet the FTC illegality standards, only 23% would likely be enforced by the FTC.

My latest working paper, which bears the same title as this post, is now available on SSRN. In the paper, I address the challenge created by the Supreme Court’s 2007 Leegin decision, which abrogated the 96 year-old rule declaring resale price maintenance (RPM) to be per se illegal. The Leegin Court held that instances of RPM must instead be evaluated under antitrust’s more lenient rule of reason. It also directed lower courts to craft a structured liability analysis for separating pro- from anticompetitive instances of the practice.

Since Leegin was decided, courts, commentators, and regulators have proposed at least four types of approaches for evaluating instances of RPM. Some of the approaches, like that advocated by the American Antitrust Institute, focus on whether an instance of RPM has raised consumer prices. Others, like that set forth in the pending Toys-R-Us case, focus on the identity of the party initiating the RPM (manufacturer or retailer(s)?). Some, like that proposed by Professor Marina Lao, focus on whether the product subject to RPM is sold with retailer services that are susceptible to free-riding. One approach, that endorsed by the FTC, mechanically applies factors the Leegin Court mentioned as relevant, but with little consideration of the potential for proof failures.

My paper critiques these four approaches from the perspective of decision theory (or what Josh and Geoff might call error cost analysis). Recognizing that antitrust liability rules always involve a risk of imposing social costs — either losses from under-deterrence if the rule wrongly acquits anticompetitive acts or losses from over-deterrence if it wrongly convicts procompetitive practices — decision theory says liability rules should be tailored to minimize the expected total cost of a liability decision. Specifically, the optimal rule will minimize the sum of decision costs (the costs of reaching a decision) and expected error costs (the costs of getting the decision wrong).

To evaluate how the proposed RPM rules fare from a decision-theoretic perspective, I begin by considering the theoretical harms and benefits associated with RPM and the empirical evidence on the incidence of those various effects. This analysis leads me to conclude that most instances of RPM are pro- rather than anticompetitive. I then consider whether wrongful convictions or wrongful acquittals are likely to cause greater social losses, and I conclude that wrongful convictions threaten greater harm. Taken together, these two conclusions call for a liability rule that tends to acquit more instances of RPM than it convicts. The proposed liability approaches, by contrast, are tilted toward conviction. Moreover, several of the proposed approaches would condemn instances of RPM even when the preconditions for anticompetitive harm are not satisfied.

Finding each of the proposed liability analyses to be deficient, I set forth an alternative approach that (1) reflects the economic learning on RPM (with respect to both the theories of competitive effects and the empirical evidence of those various effects), (2) is aimed at minimizing the costs of incorrect judgments, and (3) would be fairly easy for courts and business planners to administer. The proposed approach, in short, aims to minimize the sum of decision and error costs in regulating RPM.

Please download the piece. Comments are most welcome.