When Bureaucrats Do Good

Richard Epstein*

Richard Epstein

Richard Epstein

This past week, the Federal Trade Commission by a 4 to 1 vote issued a one-page statement outlining its “Enforcement Principles” regarding “Unfair Methods of Competition” under Section 5 of the FTC Act of 1914 (the “Statement”). The Statement was announced by FTC Chairwoman, Democrat Edith Ramirez, and received the support of Republican Commissioner Joshua Wright, a distinguished pro-market defender. It was released partially in response to “growing calls” by Republicans in Congress and members of the business community for “clarity” about how broadly this statute should be read.

The touchstone of enforcement action by the FTC is “the promotion of consumer welfare” done under “a rule of reason” formula that is akin to that which is used under the antitrust laws. In general, the FTC is “less likely” to challenge actions if matters are covered by the Sherman and Clayton Acts.

To an outsider, the Statement sounds as though it is meaninglessly vague, and the dissenting Commissioner Republican Maureen K. Ohlhausen complained in her lengthy dissent that “this statement includes no examples of either lawful or unlawful conduct to provide practical guidance on how the commission will implement this open-ended enforcement policy.” Taking the Statement in isolation, it looks as though her criticism reaches home. But once the code is correctly interpreted, it appears that the FTC has taken a useful step in the right direction. To defend this cheery conclusion, it is helpful to place the Statement in historical context.

The story starts when Woodrow Wilson took office in 1913. Wilson was an enthusiastic backer of two complementary statutes that were intended to strengthen government control over various market processes. Section 7 of the Clayton Act made it unlawful to acquire either shares or assets of another corporation where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” In the same year, the FTC received authority under Section 5 of the newly passed FTC Act to “prohibit unfair practices” with Section 5 stating: “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”

A sensible initial reaction to this massive mandate is to reject it as hopelessly vague and politically dangerous, given the formless discretion it confers on key government officials. It is no surprise that this one short sentence has spawned an enormous and erratic jurisprudence over the past 100 years. But there is less randomness than appears at first sight, because the broad language of Section 5 sets up a real conflict between two polar opposite conceptions: classical liberal and progressive views of the regulatory state. The former strengthens the market institutions that the latter disrupts.

Start with the phrase “deceptive practices.” It covers not only deliberate misrepresentation, but also various forms of concealment or nondisclosure. The harder question is what, if anything is meant by the word “unfair” that is appended to it. At common law, it was widely understood that “unfair competition” was just a useful variation on traditional deceptive practices that applied where one merchant palmed off his own inferior goods, claiming that they were made by his competitor, or by falsely disparaging the quality of a competitor’s superior goods in an effort to divert sales to himself.

In addition, unfair practices covered efforts to disrupt a rival’s business by scaring away his customers with loud noises, or, in rare cases, using force to drive them away. Thus, under one interpretation of Section 5 the FTC simply creates a system for the administrative enforcement of legal norms that are essential to the operation of a competitive economy. Adam Smith can breathe easily.

A similar ambiguity is contained in the elusive phrase “unfair methods of competition,” which at its core also neatly covers the use of force and misrepresentation in business relations. But from the outset, this term also applied to various practices short of force and fraud that allowed a person to obtain an improper marketplace advantage. The obvious candidate for these unfair methods of competition were the practices made illegal under the antitrust laws, of which the easiest targets were efforts to monopolize or cartelize a market in ways that restricted output, fixed prices, or divided markets. At this point, the question is what does the FTC Act add to the Sherman and Clayton Acts that were already on the books.

But a second meaning of “unfair” has many progressive adherents who deeply distrust all competitive processes. In their view, many market practices themselves are rightly labeled as unfair, which justifies conscious and forcible government actions that override them. One possible candidate for such “unfair competition” is a business lowering prices in an effort to expand market share. The progressive notion of “ruinous competition” made popular in the New Deal period denounces those practices for the burdens it imposes on competitors, without regard to their impact on overall consumer welfare.

Tragically, this notion of unfair gained immense traction during the 1930s and led to the introduction of hundreds of codes of competition under the National Industrial Recovery Act (NIRA) of 1933. The NIRA ushered in a disastrous social experiment to fix wages and prices, set up production quotas, and restrict new entry into industry. In 1935 NIRA was struck down in ALA Schechter v. United States, in part because its definition of unfair competition went beyond the common law notion of “palming off.” But that decision was short-lived, for out of the ashes of the NIRA came the National Labor Relations Act of 1935, with its array of “unfair labor practices” and the Agricultural Adjustment Acts, which works toward the same end by establishing “fair exchange” values for commodities based on the prices set in the boom agricultural years between 1909 and 1914.

The good news is that this Statement moves the FTC sharply away from that progressive conception of fairness. The phrase ”consumer welfare” is commonly used in economics to defend competitive practices that raise overall welfare. The phrase makes it clear that the FTC will not protect competitors from competition, as so much of the New Deal legislation does. Consistent with that view, the Statement embraces the so-called “rule of reason” methodology of the antitrust laws, which evaluates any given act or practice by asking whether it “must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”

In most cases, this formulation will pose few obstacles to the FTC in going after horizontal arrangements (i.e. those among competitors) that tend to create monopolies and cartels. It also makes it a lot harder to prosecute various common business practices such as standard-setting organizations for complex technologies or loyalty discounts. The former are strictly necessary to allow an industry to establish uniform infrastructure, which enables competitive firms to communicate and cooperate with each other. The latter are used by all firms large and small to attract repeat business. Placing a strong thumb on the scale against prosecuting these so-called violations is a useful guideline to restrain FTC action.

There is still, of course, the question of why it is that the FTC needs its so-called “standalone” authority to pursue violations given the wide purview of the antitrust laws. In her recent speech about the Statement at George Washington Law School, FTC Chairwoman Ramirez gave two reasons to support the FTC’s residual authority. She first claimed that the range of potential improper trade practices is so vast and ever-changing that the FTC needs its equally vast authority to respond to new challenges brought on by technological and economic progress. The standalone authority was thus needed “to reflect changing times, new business practices, and improved techniques for evaluating competitive harms and benefits.” A “flexible understanding” of Section 5 can reach “antitrust problems” that aren’t caught under the Sherman and Clayton Acts.

Both points are subject to serious conceptual challenges. First, Ramirez overstates the need to reformulate antitrust principles in light of new social circumstances. Standard antitrust analysis starts with the “widget.” It does this because the basic principles of competition and cartelization that applied to the sale of one good in 1914 apply with equal force to the sale of another today. Similarly, setting up an efficient rail network 100 years ago presents many of the same challenges that the Internet does today. The disastrous set of Federal Communications regulations dealing with Net Neutrality rest on progressive economic principles as faulty today as they were when their predecessor regulations promulgated by the Federal Radio Commission took shape nearly 90 years ago. Better one page of horse sense than hundreds of pages of regulatory babble. Flexibility is an overrated crutch that excuses regulators from the task of formulating sensible principles.

Happily, Ramirez does not fall into a trap of her own making, for she is scrupulously careful in identifying the cases covered by the FTC’s standalone authority. These include cases involving “invitations to collude” or the sharing of price sensitive information with competitors. I agree that both these actions merit antitrust scrutiny. But Section 2 of the Sherman Act is equal to the challenge when it provides that “every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce” in the United States or with foreign nations is committing an illegal act. The word “attempt” covers both cases.

But even if the Sherman Act applies, there is little harm in using the standalone authority in this incremental fashion to plug supposed gaps in the statutory language. The presumption against using the standalone authority when either the Sherman or Clayton Act “is sufficient to address” some competitive harm is a useful limiting principle.

Commissioner Ohlhausen has done a valuable service in pointing out the potential ways that the FTC might go off the rails. But the bottom line is this: Anyone who looks at the mindless net neutrality regulations of the FCC, the EPA’s prolix clean coal power regulations, the SEC’s new regulations on CEO pay ratio disclosure, or the FDA’s stance on off-label use should recall the perverse nature of most government regulations. Fortunately, the intellectual exchange taking place within the FTC shows that it is still possible for public officials to grapple with serious problems in a responsible way. May other government officials follow suit.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.

America’s Antitrust Loophole: How State and Local Governments Are Thwarting Entrepreneurs and Eliminating Competition

Jaba Tsitsuashvili

What does Chicago’s “Schnitzel King” have in common with Kentucky’s “Wildcat movers”? Both are hindered by laws that unfairly restrict their ability to earn a living simply because the established members of their respective industries have successfully lobbied for anti-competitive legislation. Throughout the country, state and local governments have erected artificial barriers to entry in all sorts of industries under the guise of protecting public health and safety. But what these laws really do is reflect the interests of the established few who have decided that they do not want new competition, hurting consumers in the process.

Surely a world where licensing requirements were entirely eliminated would not be ideal. I want some assurance that my doctor knows what he’s doing. And if I were to wind up in an ambulance, I would hope the emergency medical technician (EMT) was up to the task of keeping me alive. But this 2012 study shows that, based on fees, training and education, and mandatory exams, 66 professions had more burdensome licensure requirements than EMTs. The profession requiring the most average training was interior designer (though licensing was only mandated in four states). More widely regulated professions with more onerous requirements than EMTs included barbers (13th most burdensome), cosmetologists (17th), makeup artists (40th), auctioneers (60th), and manicurists (65th). I have a hard time believing health and safety are the primary factors driving such immense economic restrictions if it takes over ten times as long to be certified to cut hair as it does to be a certified EMT.

To understand the legal complexity of challenging these schemes, which take the form of licensing requirements, zoning restrictions, and “certificates of necessity,” we need to understand the underlying tensions at play.

When ostensibly competing companies in the same industry get together to fix prices or drive out competition, we subject their collusion to stiff antitrust penalties, often through criminal prosecution. This aversion to anti-competitive business activity is the backbone of the American free market system. It would stand to reason that if the same companies banded together to eliminate competition by the sword of government, we would similarly condemn them.

Unfortunately, the Supreme Court has seemingly bungled its resolution of a tension between two crucial elements of American freedom: the Due Process Clause of the Fourteenth Amendment and the right of unfettered political speech under the First Amendment. The Court has held that when companies engage in concerted lobbying efforts to restrict entry into the marketplace through the force of law, the First Amendment forbids curtailment of these political activities, and antitrust liability will not attach. “The proscriptions of the [Sherman Antitrust] Act, tailored as they are for the business world, are not at all appropriate for application in the political arena.” Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 141 (1961). 

The Court, in affirming this principle in City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991), neglected two important caveats. First, the presumption of legitimacy extends “so long as the law itself does not violate some provision of the Constitution.” 365 U.S. 127 at 136. Second, under the Fourteenth Amendment, a state cannot, “under the guise of protecting the public, arbitrarily interfere with private business or prohibit lawful occupations or impose unreasonable and unnecessary restrictions upon them.” Jay Burns Baking Co. v. Bryan, 264 U.S. 504, 513 (1924). These ideas, working in conjunction, should make it clear that the antitrust loophole afforded by the First Amendment must still pass constitutional muster, which arbitrary licensing laws should not under the Fourteenth Amendment.[1]

The country would be better served if the Supreme Court (and lower courts) reaffirmed our commitment to economic liberty. In New State Ice Co. v. Liebmann, 285 U.S. 262 (1932), the notion of trying to turn matters of private competition into issues of public concern was emphatically shot down on Fourteenth Amendment grounds. At issue was whether selling ice was a business inherently private in nature or whether it could be categorized as one “charged with a public use.” The Court said in no unclear terms that it was a private business interest that could not be legislatively restrained under the pretense of public concern. Id. at 277-80. Unfortunately that view has taken a backseat to the rational basis test.

So it is that under the current state of the law, entrepreneurs face an uphill battle in places like Chicago, where the Chicago Tribune has argued that the “ordinance [prohibiting food trucks from parking within 200 feet of existing eateries] doesn't serve the needs of the lunch-seeking public. It benefits the brick-and-mortar eateries, whose owners don't want the competition.” The Institute for Justice (IJ), a nonprofit public interest law firm, is fighting on behalf of the “Schnitzel King” and other food truck owners and street vendors in a recently filed lawsuit. IJ has made inroads with recent victories in Utah (where hair-braiding restrictions were struck down as unconstitutional even on rational basis grounds) and Atlanta (where the city was told that it could not kill existing small businesses by granting a restrictive vending license to one private monopoly because to do so was a violation of the City Charter).

At least in Chicago the food truck owners are subject to fairly straightforward limitations, and their ability to get their businesses off the ground is not subject to the whims of existing business owners. That is what happens in states with certificate of necessity (CON) laws, or what Timothy Sandefur of the Pacific Legal Foundation rightly calls “CON jobs.” For example, in Kentucky one cannot start a moving business without the consent of everyone who already has a moving certificate.  Granted, some sort of safety oversight may be necessary when dealing with large trucks and transportation. But existing owners can veto a startup based simply on the fact that customers might choose the new company over their own. Entrepreneurial spirit and American dream be damned. These laws make no pretense of being about health or safety. They simply embolden entrenched businesses with enough political clout to ensure that no one steps on their turf.

But why are these battles not more publicized? Why are consumers not up in arms about these unfair restrictions on their options? It’s hard to fight on behalf of a business owner that you don’t know exists. Publicity is crucial in making sure that legislators are held accountable for the measures they pass and the interests they serve. Luckily, thanks to efforts by organizations like the Institute for Justice and Pacific Legal Foundation, the mainstream media is starting to get wind of these egregious violations of the Fourteenth Amendment. CNN recently did a great job of putting faces to these battles and highlighting how real people are being forced out of business in an already precarious economy in which entrepreneurs who create jobs should be rewarded and encouraged, not shut down and fined into oblivion.

Public health and safety are real concerns, and there is certainly a wide scope for the legitimate exercise of government police power. But courts need to make clear, either by taking a broader view of antitrust law or through a more robust enforcement of substantive due process, that private parties cannot decide who sells us our lunch, who paints our nails, and who moves our couches.

[1] The difficulty in winning these cases on Fourteenth Amendment grounds is largely a function of the current state of Due Process interpretation, as established by United States v. Carolene Products Co., 304 U.S. 144 (1938). Carolene established the principle of presumptive constitutionality, making economic regulations subject merely to a rational basis test. Id. at 152 n.4.