Deep Dive Episode 120 – FTC Rulemaking: Underutilized Tool or National Nanny Renewed?

A Regulatory Transparency Project Webinar

Event Video

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This expert panel examined recent calls for the Federal Trade Commission (FTC) to engage in substantive rulemaking under the competition and consumer-protection prongs of Section 5 of the FTC Act. How far does FTC statutory authority under 6(g) extend? Is rulemaking appropriate as a matter of policy? How has FTC rulemaking fared in the past and what guideposts should apply?

Opening Remarks:

  • Noah Phillips, Commissioner, Federal Trade Commission

Panel Featuring:

  • James Cooper, Associate Professor of Law and Director, Program on Economics & Privacy, Antonin Scalia Law School, George Mason University
  • William MacLeod, Partner, Kelly, Drye & Warren LLP
  • Joshua Wright, Executive Director, Global Antitrust Institute, Antonin Scalia Law School, George Mason University
  • Moderator: Svetlana Gans, Vice President & Associate General Counsel, NCTA
  • Introduction: Nathan Kaczmarek, Director, Article I Initiative | Director, Regulatory Transparency Project

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As always, the Federalist Society takes no particular legal or public policy positions. All opinions expressed are those of the speakers.

Event Transcript

Nate Kaczmarek:  Good afternoon. We are so pleased to welcome you to this Regulatory Transparency Project webinar. Today, our theme is, “FTC Rulemaking: Underutilized Tool or National Nanny Renewed?” 

My name is Nate Kaczmarek. I’m the Director of RTP. As always, please note that all expressions of opinion are those of the guests on today’s program. 

Today, we’re very excited to bring you an insightful discussion on FTC rulemaking, and we’re thrilled to have FTC Commissioner Noah Phillips kick off the program with introductory remarks. 

Our Moderator today is Svetlana Gans. Svetlana has worked hard to stand up several recent antitrust programs with RTP, and we’re so grateful for her expertise and a continued willingness to facilitate these important conversations. Svetlana serves as Vice-President and Associate General Counsel at NCTA. Previously, she served as chief of staff for FTC acting commissioner, Maureen Ohlhausen. 

Svetlana is a frequent speaker on privacy and antitrust topics, including on FTC process and procedures. She serves on the counsel of the ADA antitrust section and several of The Federalist Society’s practice groups, including, I’m very happy to say, on RTP’s Antitrust and Consumer Protection working group. 

If you’d like to learn more about all of our guests today, you can visit our website, That’s R-E-G project dot org, where we have everyone’s complete bios. 

In a moment, I will turn it over to Svetlana who will introduce the Commissioner. The Commissioner has indicated that he will be happy to take a few questions via the chat function if you’re on the Zoom call with us. After that, Svetlana will also help us guide the panel discussion afterward. Once our panel has had ample time for discussion and debate, we’ll go to audience Q&A following the panel. So please think of questions you’d like to ask the Commissioner and our distinguished panel. 

Questions can be submitted during the panel portion by those who have joined us via the Zoom webinar. You can ask a question there by simply sending in the question via the chat function at the bottom to Svetlana or myself, or you can raise your hand through the Zoom function that allows you to do so at the bottom. And lastly, if you’ve called in, you can join the answer — sorry, join the question queue by hitting star, nine. 

With all that, Svetlana, Commissioner Phillips, and our panelists, thank you very much for joining us today. 

Svetlana Gans:  Great. Thank you so much, Nate. And thank you to RTP, Colton, Matt, and yourself for all of your help with today’s program.

It is my honor to introduce FTC Commissioner Noah Phillips. Commissioner Phillips was nominated by President Trump and unanimously confirmed by the U.S. Senate on April 26, 2018. He began his duties a few days later on May 2. Before joining the FTC, Noah served as chief counsel to U.S. Senator John Cornyn of Texas on the Senate Judiciary Committee, where he advised on a number of legal and policy matters including antitrust, constitutional law, consumer privacy, and intellectual property. 

At the FTC, Commissioner Phillips has been a staunch proponent of strong IP rights, agency transparency, fairness, due process, and the rule of law. He has spoken frequently on FTC’s role as an effective competition and consumer protection law enforcer. He has also been a close observer of FTC Regulatory powers including rulemaking, stating in a recent dissent that “one entrusted with AP rulemaking authority, it is imperative that the Commission work to effectuate congressional intent.” 

He has also discussed how the nondelegation doctrine may impact or at least guide FTC rulemaking authority. We are honored that Commissioner Phillips is here with us today. Commissioner Phillips, the floor is yours.

Noah Phillips:  Thanks, Svetlana. I really appreciate the invitation to be here with you today. It’s a great opportunity always to participate in the conversation Federalist Society hosts. 

Ever since law school, FedSoc has been such a great place for people to have important discussions about ideas to develop the law, to develop thinking about the law, and certainly antitrust. And increasingly, I think, consumer protection are areas where that kind of important thinking can have a real and practical impact. 

This was said earlier, but I’ll underscore it now. The remarks that I’ll make today are my own views and not necessarily and often not reflective of my fellow commissioners or the Commission as an institute. 

Ultimately, what I want to talk about today is fidelity, fidelity to the laws that Congress passes and fidelity of the Constitution of the United States. And there are two points with which I want to leave the audience and that perhaps the panel will discuss. The first is the point that however often it is discussed, we should never forget the very large role that regulation can play in an economy. 

And the role that it can play may be a lot larger than anyone may realize when a regulation is being put into place. And what that counsels, in keeping with the Constitution’s instruction, the entirety of the Executive Branch, is that we take care and be faithful in executing our responsibilities as law enforcers but in the context of this conversation, as rule makers. 

And I’ll note, Svetlana referred to a dissent which I’ll talk about in a little bit, I’m not sure that we have been taking the care that I would like to see on every issue. And I think that’s something to think a lot about. So that’s point number one: taking care to effectuate congressional intent, pay attention to what Congress tells us we are supposed to be doing and not doing.

The second point is I want to highlight for the audience something that I’ve noted in the past, and that is the very advanced planning going on today to do a kind of rulemaking that has only once been engaged in the entire history of the Federal Trade Commission, and that is to make rules about unfair methods of competition. Think about them antitrust rules. 

One of the things I want to raise is my view that this may present the most stark and real nondelegation controversy of our time, if this planning morphs into being effectuated. So I want to touch on those two issues, fidelities of the statute and the rulemaking that we’re doing today and some of the plans and what it would mean to make rules governing the unfair methods of competition. 

But I think the best place to start my remarks, some context historically and statutorily for the audience paying attention, is where does FTC rulemaking authority comes from. And I want to leave aside for purposes of the discussion the fairly wide variety of statutes that give us specific rulemaking authority.

What I’m talking about today is authorities that have been recognized to exist or Congress has adopted to make rules about our fundamental statute, the FTC Act, that governs unfair methods of competition—we’ll talk about that in a minute—and unfair and deceptive acts and practices, the organic statute of the FTC.

Okay. So our story begins more than 100 years ago when the Agency opens its doors in 1915. There’s a section of our statute, Section 6, which is mostly about doing investigations and preparing reports to a variety of different folks about business practices. So the FTC, there’s a big debate that goes on in the Congress before the agency is founded. 

Are we just a research organization that makes recommendations whether to Congress or to courts, if you will, a quasi-legislative or a quasi-judicial function? These are words that came up very recently in the back and forth between Chief Justice Roberts and in particular Justice Kagan in the Seila Law case about the CFPB. But that’s the idea, or are we going to be a law enforcement agency? And the settlement in the statute is basically both. 

Section 6 is really that formal role, that role of going out and gathering data, and then reporting on the data that you find. In Section 6 is Section 6(g), and I’ll just quote it so I’m going to look away from the camera. We are authorized from time to time to classify corporations, and I’m emitting a few words here, and to make rules and regulations for the purpose of carrying out the provisions of this sub-chapter. That’s it.

That’s been in the statute for over 100 years. And for a substantial bulk of those 100 years, we, as an agency, did not assume and to some extent the public did not assume that this conferred upon us what I will call substantive rulemaking authority. That is the ability to make rules about the economy. 

But over time, and in particular beginning in the 1960s, the agency began to take the position that this in fact did mean that. It wasn’t just rules of practice or rules about how we issued process to get the information or to prepare the reports. It was, in fact, our ability to make rules about unfair methods of competition or unfair and deceptive acts and practices in the economy.

And that is exactly what the Agency began to do. So in the 1970s, a case went up to the D.C. Circuit about this rulemaking authority called National Petroleum Refiners. And the Court did something that I think today would strike a lot of people in particular, people who participate in FedSoc events but by no means limited to that crowd. The Court looked at the legislative history, and what they said was it wasn’t clear that Congress intended to bar the FTC from doing substantive rulemaking. 

And because it wasn’t clear from the legislative history that Congress didn’t want to give the Agency the power that it said it had, the Agency had the power. This is a very interesting opinion to read. I commend it to everyone.

But one thing I would submit is this is not the kind of analysis that one often sees courts doing today. But in, I think it was 1972 or 1973, you can forgive me if I’m wrong, the D.C. Circuit said we had this rulemaking power, and, again, we used it. We even used it once to make an antitrust rule that had to do with the relationship between manufacturers of men’s and boy’s tailored clothing and sellers. 

There were complaints from some constituencies that the big stores were getting a lot of help financially and otherwise on advertising and some of the smaller stores weren’t. We ended up never using the rule, but that was a/ thing that happened. It was pulled down in the Clinton administration. 

Why am I bringing this up? First, it obviously bears on questions that we’re going to talk about and you’re going to hear from the panelists about, about what authority we have. But it’s also a very live question today in light of Seila Law. So that case is about the CFPB, but the principal precedent that it addresses is Humphrey’s Executor. And there is a back and forth that goes on between in particular the Chief Justice and Justice Kagan. I don’t want to minimize what Justice Thomas and Justice Gorsuch wrote. And it’s all about the powers of the FTC.

And, in fact, this provision, Section 6(g), comes up in Kagan’s dissent. And she describes the agency as having rulemaking power ab initio and looks at Roberts and says what do you mean they just have this small role that the Humphrey’s Executor court talks about. They’ve always had all of these powers, and those powers look a lot like CFPB to me.

So there is a back and forth that goes on, and it’s really interesting not only to read about what happened in terms of the CFPB, but to think about the back and forth and the fact that it is to some extent a debate about what do the words of Humphrey’s Executor, that the court wrote in the 1930s, have to say, which was about the FTC, have to say about the FTC today. So this is a very live issue, and I don’t think we’re done with it. 

To some extent, this issue has been settled because after the FTC went out and made or tried to make a bunch of rules that got a lot of people pretty upset with what we were doing. This is the national nanny which comes from an editorial written by the Washington Post, which didn’t like what we were doing, Congress put in place some strictures on how we make rules, and that is the Magnuson-Moss Act. And you’ll hear, I’m sure, later today about some of those procedures.

It made clear that there was rulemaking authority on UDAP. And in an interesting provision, it kind of left alone unfair methods of competition. What that means, I think we’ll hear some discussion on that, at least I hope we will.

So that’s some of the historical antecedent to where we are today. So let me talk about what I said earlier about fidelity to the statute. I think there are two really important things we need to make and keep in mind when we’re making regulations. The first is do we think that the policy underlying the regulation is well predicated? And second, and I might have done this in reverse order, do we have authority to make the regulation that we want to make? 

In a couple of cases over my tenure, my view has been that the Commission hasn’t had those things top of mind as much as it should, or maybe I just disagree with my colleagues. So we issued a proposal to amend the safeguards rule. This governs data security and, to a lesser extent, privacy for financial institutions. And I didn’t think we really had a basis to conclude that there was a special problem for financial institutions that the changes in the rule wouldn’t effectuate. I wasn’t sure we had a good factual basis to propose that rule, and so I dissented from that.

And then another more recent case involving the Made in the USA standard, which is something the FTC has done through guidance and law enforcement for decades, my view is that we just went beyond the statute, statute that gives us APA rulemaking authority, regards labels on products, and the proposal that we came out with went beyond that. It went into advertising claims.

So I think it’s worth stopping and pausing on that for just a moment to make a really important point here. A lot of times when we talk about regulation and distortion on markets that it creates, the cost on firms and things like that, we talk in the abstract. And that’s all well and good, but it’s important to remember that when we’re making rules, it’s in the context of political input, of things that are going on in the world. And rules are often much more appealing when you adopt them than rules in the abstract. 

So I said in my dissent, the popular appeal of toughening our enforcement of Made in the USA can’t be gainsaid, or gainsaid, however that’s pronounced. And I think that’s right, right, just a very popular program. People want to buy American products. But that doesn’t take away our need to adhere to the statute. And I think that’s a really, really important takeaway here. 

And so I felt compelled to dissent, and I was the only one who did that. Even if an issue is popular, even if no one will criticize you for proceeding with a rule, my view is the statute still needs to loom as large as anything in agencies exercising the authority that Congress gives them.

Okay. I’m just looking to make sure I’m not missing any notes. Oh, right. So what is the broader context in which this argument is particularly important? Right now, the FTC is asking for rulemaking authority for privacy. And we have certain rules that we can make. I mentioned the Safeguards Rule but in particular the Children’s Online Privacy Protection Act, and those rules can have a really big impact. 

If Congress does in fact create a comprehensive national privacy law, you’re going to have, in all probability, rules that govern the collection, the use, the sale, the treatment of data that are endemic across the economy. They’re not just going to govern technology firms. They’re certainly not just going to govern big tech. They’re going to govern all sorts of companies.

And so when you’re thinking about giving that kind of power, as Congress is, to an independent agency in particular, you want to make sure that you cabin the discretion. And it’s the agency’s job to follow that cabining. And so what you’ll see is the debate that goes on in after hearing after hearing between, in the main, Democrats and Republicans and certainly the Democrats and the Republicans on the Commission, whether we should have broad rulemaking authority or more narrow.

And I think it’s important that we keep it narrow because otherwise, what I worry about is just giving a lot of discretion to people who are less accountable and who really don’t occupy the role and never have legislated. So this is the background, the important background, I think we need to keep in mind in having this discussion.

Okay. So I mentioned earlier this concept making antitrust rules to effectuate or apply substantive standards to the economy based on the wording unfair methods of competition in Section 5 of the FTC Act. So this relies on that 6(g) authority that I mentioned earlier. 

As I also mentioned earlier, it’s only been done once and it was never used, meaning we never brought a case on it. Ultimately, that rule, that’s the men’s and boy’s clothing rule, was repealed. It’s important to understand that some of the people who are very eager to see the FTC make unfair methods of competition have pretty grand ambitions for what those rules would accomplish. 

I’ve seen proposals out there in the ether to do pretty dramatic things to how we do antitrust law. And it’s important to understand, however you feel about the proposals, these are proposals to accomplish that end, not through legislation, not even through the development through caselaw of the rule of reason or other ways of looking at antitrust cases but just in agency making a rule. And that’s a very different kind of way of approaching a broad-based rule for society.

There’s one proposal that came up to the Commission on non-compete agreements. It was to ban them outright. I personally have some concerns about how non-competes work in our society and the fact that they may be too widespread and may be protecting more than they ought to. But the question of what you’re dealing with as in Made in the USA doesn’t fully answer the question of whether you ought to use a particular process to achieve a solution.

I think all of this is particularly interesting in light of the debate that has come back to us and that’s often talked about in the context of The Federalist Society about the nondelegation doctrine. So there are kind of two big cases that come out of the Supreme Court nearly a century ago that lay out what the nondelegation doctrine is. And you’ve seen of late, in particular in the Gundy case, some back and forth over nondelegation from what appears after Justice Kavanaugh’s statement in the Paul case to be a majority of justices interested in this issue. 

But the big case I want to start with is Schechter Poultry. So Schechter Poultry is of course famous for a variety of reasons, but one of them is that it applied the nondelegation doctrine to strike down the National Industrial Recovery Act, which was part of the new deal, which enabled the President to make codes of fair competition. And the Court felt that this was giving legislative power in effect to the President and that Congress couldn’t do that. 

That is particularly interesting here because as Schechter Poultrytalks about, the statute that I am talking about, the FTC Act, has the wording unfair methods of competition. Now, the Court in Schechter Poultry was aware of this, and they talked about it. But one of the things that they said, they described an FTC process that looked at those words, unfair method of competition, in light of case by case development, looking at particular facts and particular circumstances and coming out with a result that way. And that is a very different thing, especially in the context of delegation, which is a doctrine about rulemaking, from a rulemaking authority. And I think it’s important to keep that I mind. 

I’ll give you the quote from Schechter Poultry. “In particular instances upon evidence in the light of particular competitive conditions, a commission, a quasi-judicial body, may go on to explain why that’s different from giving the president the ability to declare codes of fair competition.” 

So by the way, note that wording: quasi-judicial body. Very much the same wording as the Humphrey’s Executor court. I think it’s also worth taking a look at what Justice Gorsuch did in his Gundy dissent. He looked at that debate, and he has a very interesting albeit brief discussion of what may be unfair methods of competition means or meant and maybe what it does or didn’t.

He also has a very interesting discussion about his views about the intelligible principle, which for a long time, has been the test for nondelegation. And I would submit that at least today, the way some people talk about antitrust, it’s very difficult to find certain things. So what do I mean? For those of you who are not antitrust folks, people these days have really, really high hopes and great expectations for what antitrust can solve. I mean everything from your problems, with democracy or labors take of our economy’s gains to privacy. The list goes on and on and on. 

And the broader you think the word unfair goes, the broader you think the word method goes, and certainly the broader you think the word competition goes, I think the more difficult it is to argue that that is some sort of limiting principle. And I think it’s important to keep in mind that some of the folks pushing for rulemaking authority under UMC are also pushing for antitrust to mean a great deal more certainly than it means under the Sherman or the Clayton Act as it was understood by the courts from the FTC Act was passed, and very much more than it means, I think, in many respects today.

So if it isn’t the Sherman and the Clayton Act, and there’s general agreement, by the way, that unfair methods of competition goes broader than the Sherman and Clayton Acts do, what does it mean? You’ll hear later from Josh Wright. Josh Wright was, of course, the progenitor of the UMC policy statement. That’s one thing we know that it means from the FTC as an institution. 

But among other things, that statement contemplates case by case rulemaking. So what does it mean — excuse me, case by case lawmaking? What does it mean, then, to apply that test to a rulemaking? There is some invocation of legislative history, but I think we all know why legislative history can be a pretty unreliable guide in terms of telling the market and telling regulators what the standard is. So I’ve probably gone on longer, as I usually do, than I was invited to. But I want to circle back with two points. 

First, very important for the agency to keep in mind the policy basis for a rulemaking and to adhere to the limits of the statute. And that’s especially important when, as we are as an agency, we are seeking new authority to regulate in terms of privacy what may be a tremendous amount of economic activity. 

And second, this concept of unfair methods of competition would be very, very broad and could very much trigger the nondelegation doctrine, especially given some of the ambition opponents have as far as where to take it.

So with that, I’ll sort of wrap and I’ll leave it to others. So thank you very much. 

Svetlana Gans:  Thanks so much, Commissioner, for your remarks. It looks like we do have one question in the chat if you are available for a quick question. It comes from Carl from Communications Daily, and he asks, “Has the FTC taken any steps to respond to President Trump’s executive order regarding social media platforms? And do you anticipate a request for public comment or a workshop on the topic?”

Noah Phillips:  So I would say we’re not quite there yet. I haven’t refreshed lately, but my understanding is the order anticipates complaints being sent for the agency to consider. And I’m not aware that that has happened yet. So there isn’t anything triggering that. 

Svetlana Gans:  Great. Well, it seems that we have no more questions from the chat. So I wanted to thank you on behalf of myself and RTP for your comments this afternoon. Quite a lot for us to take in for our panel and hopefully, we’ll be discussing several of the points you made during your remarks. So thank you so much for being with us today, Commissioner. 

Noah Phillips:  Okay. Thanks everyone. Really appreciate it, Svetlana.

 Svetlana Gans:  All right, folks. If you all could turn your cameras back on, we can start with the panel. So it is my pleasure to give a brief introductory bio remarks of our panelists today. 

First, we have Josh Wright, who is a Professor and the Executive Director of the Global Antitrust Institute at Scalia School of Law. Professor Wright served as an FTC commissioner from 2013 to 2015 and as Commissioner Phillips said, he strived to provide guidance on the boundaries and meaning of Section 5, unfair methods of competition. Professor Wright is a leading scholar in antitrust law, economics, IP law, consumer protection, and has published more than 100 articles or books focusing on these areas of law. 

Next, we have Bill MacLeod. He Chairs Kelly, Drye’s antitrust and competition practice. Bill served as a director of the FTC’s Bureau of Consumer Protection and as the Chair of the ABA Antitrust Law Section. At Kelly, Drye, Bill offers clients decades of experience in competition law, trade regulation, advertising, privacy, and data security law.

Next, we have James Cooper. James is an Associate Professor of Law and Director on the Program of Economics and Privacy at the Scalia Law School. James previously also served at the FTC, like all of us did on this panel. He served as deputy and acting director of the office of policy planning as an attorney advisor to Commissioner Bill Kovacic and, more recently, at the Bureau of Consumer Protection as an economic advisor. James has written extensively on antitrust and consumer protection topics including informational injury and FTC remedied. 

So as you know, the topic we are discussing today is FTC rulemaking. This panel will be organized in a debate format. So our listeners can hear the views from all sides of the issue. To level set, we’ll first turn to James to provide our audience with background information on FTC legal authorities concerning rulemaking. And then we’ll turn over to Bill and Josh to discuss the pros and cons of FTC rulemaking, first on the consumer protection side and then under unfair methods of competition. 

James, I know Commissioner Phillips did lay some groundwork on FTC’s authorities in this area. Is there anything else you would like to elaborate on during your remarks? 

James C. Cooper:  As usual, Noah beat me to it and did a better job than I would do so — or Commissioner Phillips did. So not surprising, but yeah, I would. It was a good — Commissioner Phillips did a good job of laying the groundwork. 

The only couple things that I would add — and let me just give a plug to one of our co-panelists, Bill McLeod. He and a couple of colleagues have a great article in the Antitrust Law Journal from maybe about 10 years ago. I don’t know how old it is, but “Three Rules and a Constitution,” which really lays out a lot of the history in more detail and ties — of FTC rulemaking and unfairness authority more broadly and ties it in real well with the evolution of the economics of advertising and information. So I’d commend anyone who wants to know more about this to read that article. It’s very accessible and fantastic. I assign it to my students every year.

And as far as I know, Bill gets no royalties on that. I don’t know how that works. But anyway, so as Commissioner Phillips pointed out, the FTC Act in 1914 began with Section 6(g) which is this little pocket of authority from time to time to make rules and regulations. And it’s in that, as Commissioner Phillips pointed out, it’s kind of in that pocket that deals with the FTC’s policy making authority. 6(b) is under there. Those are the wide subpoenas for industry wide gathering information. 

Also, the office policy planning, which I was in, does a lot of competition advocacy. And they take their authority to do competition advocacy also under Section 6, which is sending out letters to various regulators on the economic impact of regulation. So that’s how it started, and it was really — that area was really not used, and then in the ’60s, though, the FTC said you know what, we’re going to use this to make some rules.

So they set out to start making rules with respect to the Cigarette Rule, which actually — and it’s not the topic of this talk, but it was really the birth of the unfairness as we know it now. The Cigarette Rule started with kind of this what was a five-part test, which is now a three-part test as they’ve gotten rid of the public policy prong. But this began — the rulemaking began under 6(g). And then as Commissioner Phillips pointed out, this culminated National Petroleum Refiners went up to the D.C. Circuit. This was the octane rule to say that it would be an unfair and deceptive act or practice and an unfair method of competition. It would be both.

This was a rule promulgated under 6(g) to not list the octane levels of your gasoline. And the D.C. Circuit said yes, indeed, the FTC has the authority to do this. And then a couple years later, there was the Mag-Moss, which is known for the Mag-Moss — it’s the Mag-Moss warranty and Federal Trade Commission Improvement Act of 1975. 

And that just really codified what the Supreme Court had said — or I’m sorry, the D.C. Circuit had said in National Petroleum Refiners. It gave the FTC under its UDAP authority, its Consumer Protection authority, rulemaking authority and the baseline for that is informal rules under the APA, Section 553 plus some additional procedures. At that point, if the Commission shall give an interested person an opportunity for oral presentations of data, views, arguments, in addition to written submissions, and then a transcript shall be kept of oral presentations.

So it was kind of informal APA, informal rulemaking plus. After this, the FTC then — these are not my words, but I think it was Commissioner Pertschuk himself referred to as a frenzy of rulemaking with this newfound authority in its pocket. And by the way, that at the same time, Sperry & Hutchinson having blessed the unfairness — its approach to unfairness, the Supreme Court a couple years earlier having done that, it was off to the races. And again, in Bill’s excellent article, they catalog a lot of the rules that were under consideration at that time. 

And all this culminated in KidVid, which again Commissioner Phillips alluded to, this was the rulemaking that would have banned advertising outright to young children under a certain age and then banned certain types of advertising to a different set of kids. And that’s what led the FT — it was kind of a bridge too far. And that’s what led the FTC — the Washington Post to dub the FTC the national nanny and then led a Democratic Congress to actually shut down the FTC for, I think, the appropriations lapsed. 

And there was this big congressional backlash which led to the 1980 FTC Improvement Act, which — and that reauthorized the FTC, but it put even bigger hurdles on the UDAP rulemaking authority including you have to have a regulatory agenda. I mean, I won’t go into the details, but Mag-Moss was, in ’75, was kind of informal rulemaking plus. And this was informal rulemaking plus plus plus. So there was a lot more put on to it in 1980 as really kind of a punishment for overreaching.

And so this is where we stand now. So what do we have under Section 18? There’s UDAP rulemaking, which where the FTC can declare a certain practice unfair or it can actually prescribe conduct that industry has to do in order to prevent harm to consumers that would otherwise be unfair. 

And then there is still 6(g) hangs out there, unclear that there is some scholarly debate over whether the FTC actually even has authority to promulgate rules under 6(g). Especially one thing that people point to — and this is what I’ll — I just, one of the last little things I’ll add is the remedies.

So under the UDAP, the consumer protection rulemaking, there’s clear — the FTC has clear remedies to paths that can get redress, equitable monetary relief and damages for violations of the remedies and it can also for knowing violations, for some kind of scienter, it could actually get civil penalties for violations of rules that is promulgated under this. There is no such provision for UMC Section 6(g) violations. So again, unclear what the sanction is. So that’s kind of where we stand.

The other thing I would add, and I will talk about this a little bit, again, Commissioners Phillips got into it, is in addition to the organic rulemaking under unfairness and deception, the FTC does have rulemaking authority under a host of statutes. For instance, COPPA or the Contact Lens Rule, in order to make specific regulations, some of which have civil penalty authority like COPPA, some of which don’t, like the Contact Lens Rule. 

And then finally, there is Section 5(a) of the FTC Act, which is the — gives the FTC some power to make rules with respect to labels regarding origin of manufacturer. This is the proposed rulemaking, the Made in USA proposal rulemaking Commissioner Phillips dissented on a few weeks ago arguing that the statute confines it clearly to labels. And the FTC was defining, at least in its proposed rulemaking, labels as really all manner of advertising.

So that’s another font. But anyway, that’s kind of where the FTC is and I’ll turn it back over to you and to Bill and Josh to get us started on a debate.

Svetlana Gans:  Great. Thank you so much, James, for that introduction. So I’d like to turn it over to Bill and Josh to discuss FTC rulemaking on the consumer protection side and give a little time for rebuttal. And then we’ll turn it over to what I think is the heart of the issue which is rulemaking under unfair methods of competition. Bill? 

William C. MacLeod:  Thank you, Svetlana. Welcome everybody. It’s great to be here today, especially coming from my FTC background where I like to tell folks that I lost two cases in the courts of appeals when I was at the Bureau, and one of them had to do with a rule. And as a matter of fact, it’s not widely known, it was a competition rule that we tried to put through the Commission and tried to get through the courts. And we were turned down for reasons I’ll explain in part two of our debate. 

But let’s go to part one, consumer protection. And I think the title ought to be is who’s afraid of the big bad rule? There are lots of good that we can do with rules, and the real challenge, I think, for the FTC is simply to ascertain when something lends itself to a rulemaking approach and when a particular issue is simply too complicated. 

There is an excellent article that Commissioner Chopra wrote and with Ms. Khan—it’s in the University of Chicago Law Review now—talking more about unfair methods of competition. But it also addresses what has become, I think, the watch word for dealing with consumer protection rules as well. And that is laying the basis for when a rule is appropriate. 

And in a nutshell, we actually saw some of this codified when the FTC Improvements Act codified some of the FTC’s enforcement policy statement for unfair methods of competition — or unfair acts and practices in advertising. Is there a widespread problem to begin with? Does the Commission have familiarity with the problem? Is there a remedy that is a remedy that is likely to advance the benefits to consumers more than it will impose costs on consumers and competition? 

And there are a number of cases where the Commission has promulgated rules, and those rules have survived review. And they have survived review on those bases. I think there is one thing that many of those rules have in common, and that traces back to the original effort that James talked about that I discussed in my paper.

The Commission back in the early days, shortly after the Surgeon General’s conclusion that cigarettes were hazardous to your health, first proceeded by cases and then decided to launch a rulemaking requiring a notice on cigarette packages to bear the warning to consumers. That rulemaking by the FTC was supplanted by a legislation that more or less accomplished the same thing, but it was a rulemaking that very logically could have satisfied the criteria for the rules. 

The Commission had been involved in cigarette advertising for a long time. There was a good deal on history with which the Commission was familiar about the health consequences of smoking. Indeed, back in those days, it was no surprise the Surgeon General really caught up with everybody else when the official pronouncement came out.

But this was a rule that didn’t tell an advertiser or a company what it couldn’t say. It was a rule that laid down some methods for how to communicate information. If you look at some of the rules that ultimately survived the rulemaking campaigns of the 1970s and 1980s, many of those do the same thing. 

The Used Car Rule, still in effect today. It basically told used car dealers how to display the information about what they were actually selling. Was the car under warranty? Was the car as is? That was a rule that replaced an original rule that would have — or an original proposal, that would’ve actually forced car dealers to offer warranties in the first place, declaring it unfair if you sell a beater as is.

The Commission turned that from a mandatory conduct rule into an information provision rule. We see other things like that. The Funeral Rule’s more or less the same thing. It doesn’t tell a funeral director what he or she can or cannot sell. It simply says lay out the options, let the consumers choose. 

I see some of the same potential in the rule that Commissioner Phillips talked about, the Made in America Rule that the Commission is now proposing. However, in each one of these, we need to remember that there is a cost. As a matter of fact, the Commission recently reported to Congress that if Congress wants the Commission to be adopting a bunch of rules, the Commission had better receive the resources to write those rules, let alone to enforce them.

The Commission reported that when it was finished implementing the FACTA rules, the Accurate Credit [Card] Transaction Act rules, it took the Commission three years and 50,000 hours to write the six rules that implement FACTA. And that’s before they bring a single case.

I am on record so I can’t really run away from it, telling Congress that it is very important to remember that every time an attorney or a group of attorneys is sitting in an office writing the rule, you are taking a consumer protection cop off the beat and preventing that cop from stopping a consumer protection violation from taking place. That is a very important balance the Commission has to strike. But that balance can be struck in some very efficient ways. 

And what do we end up when we turn a violation of Section 5 into a violation of a rule? We go from cease and desist — I’ll leave aside for the moment all the financial penalties that committing can impose with its equitable rules, to $43,000 per violation. If that poor used car dealer forgets to put the sticker on his car, 43,000 bucks. Forget it on two cars, 86,000 bucks. That’s a pretty heavy hand of regulation.

But I will leave it at that and turn it over to Josh.

Hon. Joshua D. Wright:  Thanks, Bill. And it’s great to be on with everybody. Bill started by asking, and I love the framing, is who’s afraid of the big bad rule? Well, I am. And I think it’s my job to try to make you a little scared too. So let me give it a crack.

But I think my punchline, in advance here because I think there’s going to be some agreement between Bill and I on this, is that you should be a little bit afraid of consumer protection rules and a lot afraid of UMC rules. So I’ll save most of my fear mongering for the back half when we do the UMC.

But let me layout — I think where the rubber hits the road here is we agree on the right question which is what’s the right basis — what condition should be satisfied in order for the FTC to set forth a consumer protection rule? I voted in favor of plenty of consumer protection rules. And so, certainly, it is not my position that it is never appropriate, indeed can be quite appropriate and a useful tool for the agency. And so I think there’s plenty of agreement there. 

So a couple of things that I think are things that the FTC should be thinking about and everyone who thinks about the FTC should be thinking about as well, about FTC rulemaking in the consumer protection space. And I would add these to my list of conditions that need to be satisfied before we go down the consumer protection rulemaking path. And my list just might be a little bit longer than Bill’s.

So here we go. One, and I think as Commissioner Phillips mentioned this with respect to the Made in the USA Rule, and I’ll use that as an example for a couple of these points because it’s a recent rule and it illustrates some of the issues quite well, is that fidelity to the statute still matters. And an FTC rulemaking adventure on the consumer protection side that strays from statutory authority is rife with legal risk. And I think particular in the era of Seila Law, this is something that the Agency has to be on top of even more than it has been prior. 

So the dispute in Made in USA I think is illustrative whether or not labels include advertising is the statutory battle that takes place in the statements between commissioners. My own view on the narrow statutory question, and it shows up in Noah’s statement as well as Commissioner Wilson, is that Commissioners Phillips and Wilson get the better of that debate. But the important point is what matters inside the Agency, this rulemaking production function out of which we take those consumer protection attorneys off the important beat and the important work they do and we send them over to rulemaking, what I don’t want to see is a rulemaking function inside the Agency on consumer protection side where most of what we do is take return trips to the D.C. Circuit. 

This has been a lot of — I mean, the amount of time that the sister agency, the FCC, spends doing this and not just on high profile rules like net neutrality but in general, I think is a little bit of a cautionary tale in this regard. And it gives me some pause when we think about the conditions that should be satisfied for a rule.

Legal authority probably should be on top of that list, and I worry that sometimes it is taken a little bit more lightly than it should be. And I worry about what that means, not just for the sake of rules getting struck down, and that happens from time to time, but for the wasted resources that go into that time and effort. And I think the opportunity cost is high precisely because the FTC’s consumer protection mission is so important.

A second condition that must be satisfied, and here, I think Bill and I agree and I think it’s on his list too, is that there’s substantial economic evidence that the rule do more good than harm. The FTC certainly has the capital available, the human capital, the resources internally. They have a great set of economists inside the Bureau of Economics to inform a cost-benefit analysis on any rule that it does.

But I have a little bit of concern in the consumer protection context, the UMC context too, frankly, but a little bit of concern about how consistently those resources are deployed in the name of informing rulemaking. I think if you were to take an anonymous straw poll of the economists inside the FTC and ask them how many rules they worked on or ask them how many times they were consulted in the design of a rule, before they read the MPRM, I think with truth serum, the number of economists who spoke positively about those experiences would be very small. And by very small, I mean zero.

And so I worry that the production — and this is something I wrote a little bit about when I was at the Agency. There was a — they do these inspector general reports of different units. They wrote a report on BE, which mostly had a lot of complaints from the Bureau of Consumer Protection. 

When they’re there, they’re in the way, and when they’re not there, we want them there so we can say they were there. And that’s all well and good, but I think the production function of economic inputs into the rulemaking process, we’re leaving some money on the table. I think economic input and the skills in drafting and implementing rules are compliments when done right, but it takes some thoughtful design to make sure they’re being used as compliments. And I worry that that sometimes doesn’t happen.

Since folks have talked about the Made in USA Rule, use that as an example, but I think there are plenty here. The empirical basis for the Made in the USA rule and I don’t think we need deep economic substantiation for the view that fraud is bad, right. So we don’t need to deploy 50 PhD economists for that. 

But more specifically, the sort of quantitative empirical basis for the Made in USA Rule are these consumer perception studies that say we go out and we do sophisticated research, we hope, that says consumer perception when they see Made in the USA claims is, you know, backs the rule. And the rule says all or virtually all of the product is manufactured, made in the USA. 

Well, how do we know that consumers are defrauded when they see a Made in the USA claim and in fact the product was not all or virtually all made in the USA? How do we know that there’s consumer harm of the type that the FTC consumer protection laws are meant to remedy? 

Well, we do studies. The FTC study about consumer protection — excuse me, about Made in the USA claims and the one that is referred to in the staff report and the one that presumably substantiates today’s rule was conducted in the mid-1990s. I was in high school. I don’t know that my consumer perception of claims is the same as when I was 17 years old as it is now. 

The staff report refers to the evidence and says well nobody gave us new evidence. And surely, that is true. I think one commenter did a study. This leaves me a little bit unsatisfied in terms of how we approach our duties to provide economic evidence that substantiates rules. No one else did anything since 1990 so it’s good enough for me doesn’t quite do the trick, I think, for a rule that is as important as that rule is. 

And here’s a place where I think we will agree, Bill, no doubt. If we are going to ask the agency to do serious rulemaking, not only does it require the funding to get people to write and implement rules, that goes for economic substantiation of rules too. But I would very much — if that rule got litigated and the substantiation for that rule is that there substantial record evidence in that one consumer perception study to justify a rule in 2020 and you put that in front of the D.C. Circuit, I’d sell short. 

And so I worry about that in large part because I think the FTC has all of the capability to do better than that in the context of consumer protection rulemaking. I use that as one example, and we can save the rest for discussion. But I think I would not raise it if I didn’t’ think that there was a little bit of a repeat problem from time to time there.

And some of that might be a resource problem. My own view is some of that is beyond a resource problem in that there’s a systematic need to have economic input more systematically embedded into the rulemaking function whether that is consumer protection or competition. 

And finally, the last point, and I’ll point that I think dovetails in kind of a combination of the first two for reasons for skepticism and reason to be a little bit afraid of consumer protection rules, the combination of legal authority and economic substantiation. In light of Seila Law in particular, my own view is I’m pretty sure today’s FTC doesn’t satisfy the FTC exception laid out in Humphrey’s, and it’s not very close, which I think is hinted to in the opinion in a variety of places.

But, here, we’ve got this push to do more rules with more what the opinion describes as executive function. And I think we’re asking for that authority to be challenged in the more that we’re not on our Ps and Qs about the design of these rules, I think the more likely those rules are to be challenged and the authority of the Agency to be challenged more broadly. And I think one thing that is coming, a next step of the Seila Law independent agency dance that’s been around for a while and pushed by my former colleague Neomi Rao when she was administrator at OIRA before her trip to the D.C. Circuit, is OIRA review of agency rules.

When I went through confirmation, a very popular thing to ask nominees was, “What do you think about agency independence?” and “Should there be OIRA review?” and “How much executive control of independent agencies?” And we’d see legislation sort of come up every couple of years. So it’s a popular question. I hadn’t given it much thought in 2012 when I had my hearing, and so I read what a bunch of smart commissioners had said, “If you don’t know the answer, go see what Bill Kovacic said.” So I did. You know, Bill, and Tim Muris, and everybody else had said, “We’re independent. We don’t need any stinkin’ executive agency review.”

And so that seemed like a good answer. It’s what I said in 2012. I think I was wrong. And I think OIRA review of agency rules, in some shape or form, would be a positive thing. In light of Seila Law, if I were the FTC, I’d probably ask for it now instead of waiting for it. Because if you wait, it might get worse. But this sort of combines the earlier points. I think the agency has, within the walls of the building, all of the capital and inputs to produce rules that satisfy a set of conditions, Bill, that you laid out, and a slightly longer set of conditions that I laid out. I think they’ve got all that, and I think we do agree that condition and satisfying those rulemakings is an important part of the toolkit. I just hope that the legal and economic infirmities that have showed up in some of the rules are enough to make listeners at least a little bit afraid of the big bad rule.

Svetlana Gans:  Okay. Thank you so much, Josh. Bill, do you want to do rebuttal just for one minute, and then we’ll move onto UMC rulemaking?

William C. MacLeod:  I will definitely do one minute rebuttal. Point number one, one of the smartest clients I ever had, who ran the advertising shop for a Fortune 50 company, would give all of his executives the rulebook. And he sent me a copy of that rulebook. It’s about the size of a matchbook. You open it up and it says, “Tell the truth.” With that rule, you can get a pretty long way. 

On Made in America, the statutory points that Commissioner Phillips talked about was very important. And the merits that Josh was addressing are also very important. I don’t have a position on the merits of that rule right now, except for this: I ride Harley Davidson motorcycles. They’re made in Milwaukee or in Pennsylvania. But, you know, they have some significant parts that come from the best makers in the world, whether it’s a brake here or a transmission there. If the rule says a Harley Davidson is not made in America, it’s going to be more than difficult to sell to the court of appeals. It’ll be difficult to sell to the public.

Finally, I think that we can probably transition to competition because my next consumer protection point’s actually a competition rule. So I will leave my rebuttal there.

Svetlana Gans:  All right. Great. Well, with that, Bill, why don’t you state the case for rulemaking under unfair methods of competition?

William C. MacLeod:  Okay. Well, this brings me back, once again, to the very important reminder, if you don’t have your authority right, then you can spend years with very expensive resources inside the FTC who could be doing some very powerful work, and then spending years taking it up into the courts and defending it. A rule that I propose that the Commission adopted and that the Court of Appeals for the District of Columbia rejected was a rule that we called, back in my day, the Eyeglass II rule. That was a rule that followed on the very successful Eyeglass rulemaking – the FCC first came out with a rule that basically called it an unfair practice for ophthalmologists and optometrists not to give the prescription to consumers so they could go and shop for their contact lenses, their glasses, at someplace else that was not a captive.

Well, the Commission conducted a study, and they conducted a study of the restraints that the various state laws were imposing on the practice of optometry. And the Commission found that four types of practices that were restricted in state law were affiliating with non-optometrists; an optometrist locating in a commercial setting—an optometrist could not locate in a commercial setting—; an optometrist in some states could not open branch offices; and an optometrist could not use deceptive trade names. 

Well, we decided to prohibit those kinds of laws, and we decided to prohibit those with a rationale that said, in effect, these would be unfair methods of competition if the optometrists did them themselves, if they agree not to compete across — in commercial settings. So they agreed not to open branch offices. Some of these things could be per se violations. Unfortunately, for us, the D.C. Circuit said, “This is not something you can do with the antitrust laws of the FTC. Maybe on a consumer protection law you can override state laws, but there is this little problem called state action and Noerr-Pennington and FTC. You are not going to be able to get away with that.”

But let’s get into some of the other substance. I gave a speech last year at the CFPB in which I said there’s a very easy rule right now. That rule is Section 1 of the Sherman Act. And Section 1 of the Sherman Act says all contracts in restraint of trade are illegal. That’s simple. Easy to understand. And the problem is, of course, the courts figured out very quickly—the Supreme Court itself—that a rule like that, taken literally, would shut the economy down. You couldn’t buy a car. You couldn’t buy a company. There was nothing you could do because every contract, of course, restrains trade. It gave us the rule of reason.

The problem and the difficulty with competition rules is that if the activity satisfies the criteria that we talked about in consumer protection, and that is vast experience, a remedy that clearly has benefits that exceed the costs, and a clear directive being a preferable alternative to case-by-case adjudication, then a rule can work. And you know something? In the common law, and also in the prosecution of antitrust cases, we have those things. It’s called the per se rule. There are certain elements of competition law that are so clearly — there are certain practices understand competition law so clearly egregious and anti-consumer that there’s no defense. The rule’s very simple. You cannot do it.

The problem, of course, is sometimes we get the per se rule. Wrong. When I was at the FTC, we were still cleaning up the mess left from the per se rule against non-price vertical restraints. There still was a per se rule for price related vertical restraints. We had petitions, and these petitions were largely granted by the Commission in the ‘80s, from companies that were suffering serious downturns in the marketplace because their method of competing, which was enabling their dealers to service and otherwise sell and explain their goods — a great example is Pioneer Company that was a giant in stereo manufacturing equipment in the ‘70s and ‘80s. When the Commission took away its ability to keep its dealers from freeriding on one another, Pioneer gradually lost its competitive edge because its dealers no longer promoted the product.

So what do we do? Should the Commission adopt or consider rules for unfair methods of competition? Well, I wouldn’t have much of a problem. I don’t think we have much of an economic cost that exceeded any benefit. If the Commission said naked price fixing is illegal and we’re going to promulgate a rule saying so, the problem, of course, is that rule would still be a rather pale comparison to what would happen to price fixers who find themselves in front of the Department of Justice. They go to jail. Forget about 43,000 bucks a price fix. You’d be doing time in prison if you got caught violating per se rules over at the Antitrust Division.

So for a rule really to help on the competition side, we need to find practices that will satisfy the criteria that say we can clearly identify them. And then we can put them into a category that says, “If you do this, you are fine. If you do something else, you are going to pay what could be catastrophic civil penalties.” One of the things that we’ve all encountered is the question of calculating a civil penalty, whether you’re explaining it to a client or you’re on the FTC side of the table and you are hammering out a tough consent order, the theoretical liability of a civil penalty for almost any practice that takes place, hundreds or thousands of times, is almost bigger than any company in the economy can afford.

So where can we go that takes us to a competition prospect that might lend itself to a rule? In the article that Commissioner Chopra and Ms. Khan wrote, they have a suggestion that pay for delay cases, the cases in which a patent holder of a branded pharmaceutical was running out of time on a patent, finds another aspect of the drug to get a new patent and/or simply aids in or provides some sort of assistance or consideration to potential generic competitors for them not to enter the market. The Commission came up with a study of this. They found serious consumer damage. They brought the case, and it went all the way up to the Supreme Court, which said, “It’s a rule of reason. It’s got to be addressed on a case-by-case basis.”

We’ve heard of non-competes. We’ve urged the Commission to talk a little bit non-competes today. Can the Commission write a rule that says, “Okay. It is clear enough that when it comes to this type of employee or this type of practice, the rules says you shall not or you will pay a penalty”? That is a very tricky proposition. I’m not going to take a position on that right now. I’m going to let Josh go into whether he thinks any of these prospects give us a possibility of a pro-consumer competition rule.

Hon. Joshua D. Wright:  Thanks, Bill. And sort of mindful of the time, I will try to get through my answer pretty quickly. The answer is no I don’t. I don’t think that any of the prospects on the UMC side satisfy the conditions. But I’ll filibuster for two more minutes anyway. But the answer is no.

And I think Bill lays it out perfectly. The comparative advantage for rulemaking as opposed to adjudication really requires a set of conduct for which we know it is always or almost always likely to harm competition. The language I just used purposefully is the Supreme Court’s language for the definition of a per se rule. The problem is we’ve already got the per se rule, and we’ve got criminal penalties for that.

And so there’s a reason why, I think, the proposals that folks inside the agency, like Commission Chopra, or proposals made to the agency about rulemaking don’t want to do per se rules. I mean, the list of the actual proposals for UMC rulemaking are: a flat out ban on non-competes which are governed by the rule of reason. 

To make presumptively unlawful, or altogether unlawful, reverse payments. In addition to soon-to-be professor Khan and Commission Chopra’s article, Scott Hemphill wrote about reverse payment rulemaking awhile back. Again, sort of post-activist rule of reason activity. 

Making a breach of FRAND a Section II violation: not a single federal court case in the land has found that breach of FRAND constitutes a Section II violation. But some proposals to make that a rule and have a breach of FRAND be presumptively unlawful. 

A proposal to implement the 1968 horizontal merger guidelines market share thresholds as a rule under the Clayton Act. 

Those were the four I could find with my Google machine. Or the search engine of your choice. And you will notice that all of them are rule-of-reason style analyses. And so, to me, when I see the sort of proposals actually on the table, none of those satisfy the criteria. But they have something else in common. I think they’re generally an attempt to evade, circumvent, existing Sherman or Clayton Act doctrine. I think that’s the name of the game here is the burden of proof is high, or too high, to win a rule of reason case. And so I’d like to evade to use a Section 5 UMC in order to get myself a violation.

Well, that was the problem with Section 5 that led to the UMC policy statement in the first instance was attempt to evade, bring cases like Intel and exclusive dealing style cases where there’s existing antitrust doctrine and the Commission would say, “But we have UMC and if we use it we’re going to win. So settle here. Thank you.” That was one of the main reasons for the UMC statement. And so when I see most of the proposals as attempt to evade existing doctrine that’s sort of evolved through the common law-like process of interpreting the Sherman Act and the Clayton Act, I’m dubious of most of the attempts. The Supreme Court has said rule of reason, and if someone doesn’t like that, they propose a rule and it turns out, you need three votes to get a rule out, at least until you go see the D.C. Circuit.

And so, to me, I think most of the proposals on the ground don’t satisfy the necessary criteria. Instead of talking about it, I will recommend to readers on top of Bill’s excellent article, there’s an ABA comment on non-competes in particular is the problem they’re talking about but a nice section on—and James covered some of this earlier—on rulemaking authority from a legal perspective and some of the questions that arise there. But to take, for example, non-competes, which I think are probably the most popular rulemaking flavor of the day on the UMC side, and either a ban altogether or the narrow approach would be something like a targeted ban on non-competes in low-wage industries, or something like that.

Even at that, I think the economic evidence is sort of dubious to support a rule. If you look deeply at most of those studies, and somewhere up on the GAI YouTube channel, there’s an interview of Bruce Kobayashi and Evan Starr, who is the producer of most of the evidence, and they survey it. And it’s nice for readers — for listeners who are interested in non-competes specifically as a topic. Some of these studies that find suppression of wages by use of non-competes, some of those studies also find benefits that arise. You get a reduction in input prices but an increase in output, or something like that, right? 

As far as I know, there is a Commission statement that passed with 4-1 vote and is the law of the land of the agency’s interpretation of its own UMC authority is that we employ the consumer welfare standard with respect to UMC violations. Nowhere do I know in antitrust do we look at a change of an input pricing conclude that we know something conclusively about consumer welfare. Lots of places in antitrust we think that a reduction of input prices is a good thing. Lower costs get passed on and so forth and so on. So I think there’s reason, just sort of in that particular rule, just for fun, I’m not sure that the existing evidence would substantiate even the targeted rule. I think that’s an open question. I think that’s a tough question. 

But more generally, I think the impetus for rulemaking is — involves attempts to evade existing Sherman Act and Clayton Act doctrine. I think those attempts run into some trouble when attempting to invoke the UMC to save oneself from the Sherman Act, precisely because, and I think the biggest benefit of the UMC policy statement is that it says that you can’t do that. It says that the agency won’t do that. Now, they can try, right? They can have three votes to say, “We don’t need to satisfy the rule of reason in able to substantiate a UMC rule.” You can do that, and presumably, a petitioner challenging that rule will waive the statement around the D.C. Circuit.

Well, that’s what the statement was for. The statement was to constrain the agency’s ability to go outside the consumer welfare standard in implementing rulemaking. And as far as I see it, most of these proposals — some of the non-compete proposals, certainly the bans, the bans on reverse payments, some of these proposals are pretty naked attempts to do that.

Now, I wish I could tell you when we did the policy statement that I saw those attempts at rulemaking coming. I didn’t. Or that it would become really popular to say that we should turn the consumer welfare standard upside down and use antitrust to achieve non-welfare goals. In fact, the largest piece of criticism of the UMC statement at the time was, “Josh, the first prong says UMC is just about the consumer welfare standard. But we all know that. That’s redundant. You don’t need that.” Tell that to Commission Chopra or open markets. Or propose legislation in front of the Senate of the United States of America. That would get rid of the consumer welfare standard. 

So I think better to be lucky than good sometimes, and I think it’s pretty lucky that the statement includes that provision and is, still as far as I’m concerned, is law of the land at the Agency. And I think we’ll have some constraining effect on rulemaking as it should. I’ll stop there.

Svetlana Gans:  Great. Thanks so much, Josh. So, Bill, just being mindful of time, do you want to do a 30-second rebuttal and then we’ll move on? We have one audience question already, and then I want to head to James for some thoughts on remedies and then we’ll open up the floor for additional questions.

William C. MacLeod:  Sure. In 30 seconds, I will agree with a point that Josh made, and it’s a very important one. And that is a competition rule that is intended to change the substantive law from that which has developed is, I’d say, going to be dead or alive in the courts of appeals. That violates the basic principle that we’ve been talking about so far. It needs to be something that is clearly established with extensive experience to be amenable to a rule. Changing merger law back to the 1960s does not quite qualify.

Svetlana Gans:  Got it. Great. Thank you. Nate, do you want to open up the floor for questions, and while you do that, I will ask James a question about remedies and liabilities standards.

Nate Kaczmarek:  Sure. So if our audience would like to ask a question, there are three ways you can do so. The first is by hitting the chat function at the bottom of the screen and just sending it to us. You can also raise your hand, which is another option at the bottom of your screen. And lastly, if you’re calling in by phone, you hit star and then the number 9 on your phone and you can enter the queue that way. 

Maybe while they gather for the queue, Svetlana, do you have a question?

Svetlana Gans:  I do have a question for James. So James, you’ve written a lot about FTC remedies, and in your thoughts on rulemaking, what are the tradeoffs with respect to remedies and liability standards with respect to FTC rulemaking?

James C. Cooper:  Yeah, thanks, Svetlana. I’ll be quick on this so we can get to the audience. And Bill’s touched on some of this. What I worry about in rulemaking, and I think it would apply as much to competition rulemaking, leaving aside the legal point of what is actually the remedy under 6(g) that’s kind of left unclear at this point in the statute. But assuming there’s similar remedies—and that may be a big assumption—I kind of worry about in the rulemaking context that you’ve got this hammer that potentially, for a knowing violation and for a rule promulgating under Mag-Moss or for civil penalties say under a rule that’s promulgated under direct congressional authority. Those can be gigantic penalties. But if the behavior that it’s targeted at is not the same, if there’s heterogeneity in the behavior, then you’re not going to have optimal deterrence. 

And I’ll give an example of what I’m talking about. So I think of the COPPA rule. Now, COPPA is not an organic rule. It’s one that was promulgated under a specific congressional authority. But that prohibits — broadly, it’s about children’s privacy, and it prohibits anyone from collecting personal identifiable information from someone under 13 without parental consent. So you’d think about okay, why the animation of COPPA and why this makes sense? Well, you can think of two cases. One, you’ve got the creepy person online trying to get personal information to try and contact a child. Clearly — and that’s personal information to identify a specific individual, which is I think how it’s put in the statute or the rule. And then you’ve got collecting information from a kid, which the FTC has defined as collecting persistent identifiers, like a cookie. 

So you’ve got the actual person trying to get information about a kid, maybe trying to contact him. That’s one end of the spectrum. And then you’ve got a server collecting a string of texts from a browser that’s operated by a kid so they can give them an ad. Now, we can — this is not the forum to debate the wisdom of promulgating that, but I think that even the most strident privacy advocate or the most strident privacy libertarian would agree that those raise two different levels of harm. 

Nonetheless, the hammer, the civil penalty is not calibrated to harm. I mean, you have in kind of the catch-all phrase “in calibrating civil penalties,” or anything else that justice may require, but you look at the FTC’s record COPPA settlement with YouTube, that was about cookies. You look at HyperBeard, which Commission Phillips dissented over. Again, that was about cookies. What you’ve got to have is the ability when you’ve got this rulemaking that’s going to cover a wide swath where harms are different, you want to be able to calibrate the penalty on the backend, so you can get penalties approximately — or to harm so you can get what we would say as economists, a sort of optimal deterrence. Otherwise, I think you risk, I think, deterring a lot of potentially beneficial behavior. So that’s one of my bigger concerns with rulemaking. Something you really — that would require some serious consideration.

Svetlana Gans:  Okay, got it. Thanks, James. So we have two questions from the audience so far. The first one I’ll direct over to Bill. And we just have a few moments left. So Bill. Michael Stewart asks whether there’s some friction between FTC and CFPB rulemaking.

William C. MacLeod:  Well, I can’t speak on behalf of either agency, of course. But I have not seen any. I’m not aware of any particular tension between the agencies right now.

Svetlana Gans:  Okay. Next, we have a question from John. Maybe Josh could answer this in the first instance. Currently, the FTC regulates unfairness by litigation. Why would it not be better for companies to know what the rules are before they are sued? Doesn’t regulation by litigation put all the costs of regulation on the first companies hit by the FTC in litigation? Is this more fair than APA rulemaking?

Hon. Joshua D. Wright:  It’s a good question. And certainly, the FTC, in sort of a regulation by litigation approach has run into some problems in the courts for deficiencies in, we’ll call notice—deficiencies in notice with respect to its approach to unfairness. I think especially in the data protection and privacy areas. And I think the more it can do there to improve notice, I think the better it will fare. 

Fairness, for sure, with respect to the prospective litigants, I think is a concern there. But so is maintaining the agency’s authority. I mean, it’s an unfairness authority in litigation if it continues to litigate that way. I think it runs into some trouble and will continue to run into some trouble. I have long been an advocate on the unfairness front for the agency, doing more to disclose when, what, and under what conditions it will bring—data security cases, for example. I think it has made some improvements in that area, but more, I think, is almost always better. 

There was a push for a while to get a bit more of a comprehensive statement of both what would and what would not constitute data protection violations under the Agency’s unfairness approach. I think more improvements out front would certainly improve unfairness. Now, relative to rulemaking, there’s no doubt, I think, the question is framed a general rule that sort of applies to everyone and they know the rule upfront certainly has some advantages. Everybody knows the rules upfront. You don’t have to wait to get sued. No doubt that’s an advantage. It also comes with some advantages.

It also comes with some costs, some of those laid out by Bill in terms of the opportunity costs at the agencies. But the cost I’m more concerned with is that sort of production function of inadequate notice or substantiation, that the harms exceed the benefits in an unfairness case. Apply that to a rule, you do a lot of harm instead of a little. And that’s really the cost of rulemaking that I’m worried about. If the rule is not well substantiated and justified from an economic perspective. Sure it’s going to be fair, but it’s going to be fair because it’s going to hurt a lot of people.

Svetlana Gans:  Great, thanks. James, I think you wanted to add a few thoughts to that question?

James C. Cooper:  Yeah, just really briefly to echo a little bit what Josh had said. I think there are two things. First, the FTC, through its litigation, its in-house litigation is at least set up, I’m not saying in theory, maybe not in practice, but to elucidate areas of law. And this is why it’s looked at as a bad thing. The first bite of the apple is free but you get injunctive relief but in-house admin litigation, there is no remedy. 

So, yes, there are litigation expenses so the unlucky person who may be the test case. But unless it’s brought — it’s a consumer protection case that’s brought in federal court, if it’s brought as a first impressions, a way to make law, the cost is lower.

The second thing I would just add is, I think, that what gets lost—and, again, I think Josh touched on a little bit of this—is that rules are self-enforcing and they’re not always perfectly written. I mean, that’s why people hire lawyers, right? To find, okay, here’s a regulation that is written. Here’s a rule. Just because there’s a rule out there, number one, doesn’t mean that everyone follows it even if it’s clear. And number two, it doesn’t mean it’s clear. I mean, you spend resources — how often is a TSR violation—that’s a rule, that’s in — how many FTC complaints are there against bad actors for violating TSR? So just because you have a rule doesn’t mean now it’s clear, now we all know where the line is. It doesn’t mean there is an enforcement. It doesn’t mean there is an elucidation by the courts as well. And that kind of gets lost as well. A rule doesn’t mean we then get out of the case-by-case litigation because you still got to figure out the rule, and you still have bad actors who are going to violate the rule regardless of what player it is.

Svetlana Gans:  Great, thank you. So we’re a little over, so I just want to give each panelist 30 seconds for any concluding remarks.

William C. MacLeod:  Okay, I will start, and I will say, actually in answer to the last question, the FTC is using both adjudication and regulation, or rules, to police unfairness. A lot of the FTC consumer protection rules are based on unfairness. By the same token, some of the classic cases are cases that you would not have expected a rule to anticipate. The case that gave us the unfairness policy statement, International Harvester, geysering, fiery tractors – those are the sorts of things where you want to say the agency — or you ought to preserve the flexibility for the agency to proceed in a case-by-case basis. 

Svetlana Gans:  Josh or James?

James C. Cooper:  Nah, I don’t really have anything else to add. I just want to thank you, The Federalist Society. It was great being on a panel with Bill and Josh to talk about this stuff.

Svetlana Gans:  Josh?

Hon. Joshua D. Wright:  Executive agency review of FTC rules is coming, whether the FTC likes it or not. OIRA review of agency rules is coming, whether the FTC likes it or not. The best way to prepare for that is to have rules that satisfy cost-benefit analysis every time, out the door. And the only way to do that is to walk the halls of the Bureau of Economics and involve agency economists in rulemaking on the CP side early and often. And if this means hiring more economists, then this is what it means. And I think the Agency would be well-served to do that proactively rather than have it handed to them by the Executive Branch.

Svetlana Gans:  Great, thank you. Thank you all for joining us. Nate, I’ll let you close it out.

Nate Kaczmarek:  Sure. Well, certainly we’ve had an embarrassment of riches in having all of you. It’s been an excellent discussion. So on behalf of RTP, we’re grateful to Svetlana and Commissioner Phillips and James, Bill, and Josh. What an excellent discussion. I look forward very much to having you back again soon. And certainly to our audience, we welcome your feedback by email at [email protected]. Thank you all for joining us today. Have a great day.