FTC Claims Sweeping Powers against ‘Unfair’ Competition

R eflecting on the decades of merger challenges brought to that point under the Clayton Antitrust Act of 1914, Justice Potter Stewart observed in 1966 that “the sole consistency I can find” is that “the Government always wins.”

Mercifully, U.S. courts and antitrust-enforcement agencies have largely followed a different path in the years since Justice Stewart’s trenchant observation. Acknowledging that American antitrust jurisprudence had lacked defining principles, beginning in the 1970s, they turned toward economic reasoning to develop a consistent framework for determining antitrust violations. The result has been the elevation of consumer welfare as antitrust regulation’s fundamental concern. Based on this criterion, economic analysis is applied to business conduct alleged to be anticompetitive to determine the likely impact on consumers. Higher prices for goods or services, lower quality, or less output are the characteristic harms to be avoided.

Unfortunately, the Federal Trade Commission (FTC) under chairwoman Lina Khan wants to rewind the clock.

The FTC’s most recent policy statement makes abundantly clear that the commission’s majority wants to abandon this sole emphasis on consumer welfare. Under the FTC’s emerging view, antitrust enforcers would not need to show actual or likely consumer harm to deem certain business practices as “unfair methods of competition,” nor would efficiency gains be sufficient justification for such conduct. Instead, the commission will decide what is “unfair” based on whether the conduct might harm “competition, workers, or other market participants.” If that sounds extremely vague, it’s because it is. This will be a giant leap backward for antitrust.

Under current precedent, there are two kinds of antitrust violations, both based on economic theory and concerned with consumer welfare. Actions such as colluding with competitors to fix prices are assumed to be illegal because basic economics (and extensive judicial experience) show how price-fixing hurts consumers in general. For activities that tend to harm consumers, a general ban will tend to get things right and spare courts the burden of lengthy and costly relitigation of introductory economics.

As the science of economics and antitrust-enforcement experience have progressed, courts have learned that most business conduct doesn’t neatly and obviously fit into the binary of “good” or “bad.” Mergers and other challenged business practices are instead evaluated on a case-by-case basis to determine whether they restrain trade, as well as the balance of costs and benefits that restraint entails for consumers.

For example, a smartphone manufacturer might become a monopolist because it makes the best phone at the best price, which is good for consumers, or because it finds ways to keep out competitors, which is bad for consumers. “Monopolizing a market” is not necessarily bad: The economic argument could go either way, depending on the context, and it is up to each side to make its case. This approach to settling antitrust disputes — shifting the burden depending on the evidence presented by the plaintiff and the defendant — is called the “rule of reason.”

The consumer-welfare standard and the rule of reason together provide a predictable logic to identify whether business conduct should be considered legal or illegal. These principles also constrain what kinds of arguments the FTC can make and serve to rein in an agency that could otherwise seek to regulate vast swaths of the economy as haphazardly as it once did. (For example, in the 1970s, the FTC tried to make itself a “national nanny,” as the Washington Post called it, and ban all marketing toward children.) As Daniel Gilman and Gus Hurwitz write in their policy brief on the subject, the new FTC policy statement is “untethered from consumer welfare and the rule of reason.”

As I pointed out previously in National Review, this abandonment of consumer welfare by Chairwoman Khan’s FTC is not surprising. Instead of pro-consumer, she is “antimonopoly,” which, as she once explained “refers to a framework that seeks to control and check private concentrations of economic power. Promoting antimonopoly does not categorically require promoting competition.”

Indeed, the FTC has made clear its intent to protect struggling companies from competition by going after behavior that may be “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.” Who could argue against stopping coercive or abusive behavior? The problem is that nobody has defined what these terms mean in the antitrust context: not Congress, the courts, or even the FTC itself. At this point, nobody knows.

All of this is an unwelcome return to the days when “fairness” was up to the FTC’s whims. That’s why, in 1984, the Second U.S. Circuit Court of Appeals found that “the Commission owes a duty to define the conditions under which conduct . . . would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.” Fairness was otherwise unworkable as an antitrust standard.

The new rules — or should we say the return to the old absence of rules? — explicitly reject any appeal to consumer benefits or welfare. The FTC labels efficiency gains from challenged actions “pecuniary gains,” to suggest they are merely monetary. Those, we are told, do not serve to justify conduct, and neither does a “numerical cost–benefit analysis.” The FTC has made explicit that these established defenses are off the table.

As Commissioner Christine S. Wilson points out in her dissent, “the Policy Statement adopts an ‘I know it when I see it’ approach premised on a list of nefarious-sounding adjectives.” It “resembles the work of an academic or a think tank fellow” with dreams of “remaking the economy.” The problem is that the FTC is a law-enforcement agency and not a think tank. The FTC will sue companies based on this policy statement. What’s more, the commission has promised a raft of new regulations based on the new “principles.”

Disputes over what constitutes impermissible business practice aren’t merely squabbles between Big Government and Big Business. If handled improperly, they threaten to crush innovation and economic growth. Under the threat of suit, based on the FTC’s vague policy statement, companies will stop experimenting with new business ideas and strategies. Some may benefit, but consumers will suffer.