Articles Posted in FTC

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Antitrust-and-Competition-Enforcement-300x225

Author: Luis Blanquez

Makan Delrahim, Antitrust Chief for the United States Department of Justice, made news on June 1, 2018, when he announced that the United States will finalize and join the Multilateral Framework on Procedures in Competition Law Investigation and Enforcement.

Delrahim explained why due process is a priority for antitrust and competition enforcement: “With more than 140 competition agencies, and increased international commerce, including digital commerce, it is more and more critical that we share a common set of principles that affords due process to individuals and businesses in investigation and enforcement.” (p.2).

We applaud this effort and agree that companies—including those that do business on several continents and governed by multiple enforcers—should receive fair treatment worldwide by competition authorities.

In his speech, Delrahim mentioned the International Competition Network (ICN), among other groups, as likely substantive sources for the multilateral framework.

It just so happens that the ICN recently addressed this issue at its 17th annual conference, hosted by the Competition Commission of India on March 21-23, 2018. Indeed, the ICN adopted new guiding principles for procedural fairness in competition agency enforcement.

For those that are not familiar with it, the ICN is a network of 104 competition agencies, enriched by the participation of non-governmental advisors (representatives from business, consumer groups, academics, and the legal and economic professions), with the common aim of addressing practical antitrust enforcement and policy issues. The ICN promotes more efficient and effective antitrust enforcement worldwide to the benefit of consumers and businesses.

Because antitrust and competition agencies are now prioritizing due process, we will do a deep dive into the specific due process issues that the ICN described in its report.

One of the ICN’s several working groups is the Agency Effectiveness Working Group (AEWG).  The AEWG aims to identify key elements of well-functioning competition agencies, including good practices for strategy, planning, operations, enforcement and procedures. To that end, the AEWG recently developed an ICN Guidance on Investigative Process paper, which offers helpful tips on investigative transparency and due process. This paper follows previous reports on Investigative Tools, Competition Agency Transparency Practices, and Competition Agency Confidentiality Practices.

Following these guidance reports, the AEWG has now produced new Guiding Principles for Procedural Fairness, together with some recommendations for internal agency practices and implementation tips for good agency enforcement process.

You can access the ICN report here.

Following the two-day conference in India, the AEWG adopted the following Guiding Principles for procedural fairness in competition agency enforcement:

Impartial Enforcement

Competition agencies should conduct enforcement matters in a consistent, impartial manner, free of political interference. Agency officials should not have relational or financial conflicts in the matters on which they work. Agencies should not discriminate on the basis of nationality in their enforcement.

The AEWG highlights that agency officials should not have relational or financial conflicts of interest relevant to the investigations and proceedings they participate in or oversee. To ensure the impartiality of investigations and decision making, agencies should have ethics rules to prevent potential conflicts. And they should consider a systematic process to check for potential conflicts for all personnel working on a specific investigation.

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Author: Jarod Bona

As you may have heard, the Senate recently approved a new slate of FTC Commissioners. Among them is new Commissioner Rohit Chopra, who is a former assistant director at the Consumer Financial Protection Bureau and former advisor to the Secretary of Education.

Commissioner Chopra was sworn in on May 2, 2018 and quickly announced one of his early priorities: On May 14, 2018, he issued a public memorandum to the other FTC Commissioners and the FTC Staff describing how he believes the FTC should handle repeat offenders of FTC violations.

Let’s dig into this a little bit.

Commissioner Chopra describes the problem of corporate recidivism as generally resulting from significant management dysfunction, which requires “serious remedies that address the underlying issues.”

After describing several non-antitrust examples of this corporate recidivism, particularly involving large financial institutions, Commissioner Chopra points out, bluntly, that “FTC orders are not suggestions.” He says that—“to deter violations and maintain [the FTC’s] credibility as law enforcers”—the FTC “should carefully consider ways to build on its existing enforcement regime to make clear to market participants that our orders are to be taken seriously.”

For flagrant violators of district court orders, he believes that the agency should consider “contempt proceedings, referral to criminal authorities, and remedial injunctive relief.” Companies that violate FTC administrative orders should face additional injunctive relief and meaningful civil penalties.

Notably, Commissioner Chopra expresses a desire to go after individual executives that participate in FTC order violations, even if those individuals weren’t named in the original orders. So if a company is subject to an FTC order and violates that order, Commissioner Chopra would like to target the people that created the violation.

Structural Remedies Following Order Violations and an Important Caution

Finally, in what I believe is the most newsworthy part of this memorandum, Commissioner Chopra describes the structural remedies that he believes the FTC should explore for FTC-order violators.

His purpose in proposing these remedies is to address “the true causes of noncompliance.” Commissioner Chopra believes that certain companies may “engage in risky business practices to demonstrate to investors and capital markets that they are meeting or surpassing expectations for earnings and growth.” He also believes that “executive compensation practices might inadvertently create incentives for practices that might harm consumers or competition.”

We are, of course, treading on dangerous territory here. Businesses necessarily take risk—that is a feature not a bug. What are “risky business practices”? That is for the market—in its brutal truth and honesty—to reveal. It isn’t up to a government official or entity, without Skin in the Game, to make these determinations.

That isn’t to say that the FTC shouldn’t enforce antitrust, competition, and consumer protection laws. Nor is it to say that the FTC shouldn’t raise the penalties for repeat offenders. But protection of competition moves silently and dangerously to market distortion and harm when it decides that it is smarter than the market itself.

Those that enforce the antitrust laws with government power must do so humbly for the line between removing the barriers to competition and, frankly, screwing-up competition is a fine one that we rarely see clearly. It is best that those with power stay firmly on one side, so they don’t cross this line.

With those cautions, here are the structural remedies that Commissioner Chopra proposes the FTC consider invoking in response to order violations:

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Real-Estate-Appraisers-Antitrust-FTC-300x188Author: Jarod Bona

On April 10, 2018—the eve of my panel on state action immunity issues at the ABA Antitrust Spring Meeting in DC, the FTC granted, in essence, partial summary judgment against the Louisiana Real Estate Appraisers Board on state action immunity. You can read the FTC decision—hot off the press—right here.

I won’t go into a lot of detail here as you can read the decision, but here is short summary:

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FTC State Action ImmunityIn early 2015, the U.S. Supreme Court held in North Carolina State Board of Dental Examiners v. FTC that the “active state supervision” prong of the state-action immunity from antitrust liability test applied to state licensing boards controlled by market participants. You can read my analysis of the decision here. And you can read the amicus brief that Bona Law filed in the case here.

(Besides the “active state supervision” requirement, state-action-immunity applicants must also demonstrate that the challenged restraint was clearly articulated and affirmatively expressed as state policy by a state sovereign, like a state legislature. The Supreme Court recently addressed this requirement in FTC v. Phoebe Putney Health System, Inc. I filed an amicus brief in this case, which you can review here.)

Update: The FTC applied its Active State Supervision criteria in an enforcement action against the Louisiana Real Estate Appraisers Board.

The Basics of Antitrust Liability and State-Action Immunity for State Regulatory Boards

I have written quite a bit about state action immunity and the NC Dental case, so I won’t give a lot of background here. You can read my prior articles.

But here are the basics: Not surprisingly, state and local governments often engage in anticompetitive behavior. Sometimes this includes conduct that the federal antitrust laws prohibit.

But, owing to federalism and the fact that governments get away with things they shouldn’t, sometimes state and federal governments have a get-out-of-antitrust-liability card called “state-action immunity.” Like all antitrust exemptions, Courts interpret the scope of state-action immunity narrowly.

In most situations, a state or local government seeking state-action immunity must demonstrate that (1) the state sovereign—usually the legislature or state supreme court acting legislatively—clearly articulated and affirmatively expressed the challenged restraint as state policy (See Phoebe Putney); and (2) that the state actively supervises the anticompetitive policy.

Before the US Supreme Court decided the NC Dental case, it was an open question whether state licensing or regulatory boards were required to show both prongs of what is called the Midcal test, or just the first prong. That is, it wasn’t a given that these state boards had to show active supervision. I addressed that very issue in a law review article, which you can read here. But apparently my article wasn’t enough to end discussion on the issue, so the US Supreme Court went ahead and addressed it in the NC Dental v. FTC case.

The Supreme Court in NC Dental went on to hold that a state board on which a controlling number of decision-makers are market participants in the regulated occupation must satisfy the active supervision requirement to invoke state-action antitrust immunity.

(As an aside, certain municipalities do not need to show active state supervision, but I suspect that courts will continue to narrow this exception. Luke Wake and I argued in another law review article that whenever the government entity becomes a market-participant, it should lose its state-action immunity entirely. I mention this here because it is often a local government entity that competes directly in the market and tries to invoke state-action immunity.).

So we now know that anticompetitive conduct by state regulatory boards are subject to antitrust scrutiny unless they can show both prongs of the Midcal test, including active state supervision. But what is active state supervision?

What is Active State Supervision for State-Action Immunity from Antitrust?

Active Supervision is something that the US Supreme Court has on occasion addressed, but there isn’t a clear standard. It simply hasn’t come up enough to create a dense body of law. So the guidance is slim.

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Section 5 of the FTC ActFTC Commissioner Joshua Wright recently announced his retirement from the FTC Commission to go back to George Mason University School of Law. But he did not go out quietly.

Not only was he incredibly productive during his FTC tenure, but he left right after the Federal Trade Commission issued “Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” As you may recall, this was one of his express goals when he first began his work at the FTC.

What is Section 5 of the FTC Act?

Section 5 of the FTC Act declares that “unfair methods of competition in or affecting commerce” are unlawful.

What does that mean?

For most of the FTC’s existence, those of us advising antitrust clients had to piece together inferences from a mere handful of cases that have addressed the Act, while at the same time trying to parse speeches and FTC activity by whatever set of commissioners were in power.

There were some cases—mostly decided in the 1980s—that seemed to limit the FTC’s power under the Act, but the authority is sparse. And the FTC seems to change its mind depending upon who is in power.

That is a problem when you have a client that wants to know if they can undertake some sort of activity. It is even more difficult when your client is already under investigation by the FTC and you have to try to explain to them that the standard of whether they have violated the FTC Act—regardless of the legality of their actions under the Sherman and Clayton Acts—would be determined by their adversary, the FTC.

We could advise the client that some prior cases suggested limiting principles, but it was, in reality, entirely unclear how a court would ultimately approach an enforcement action. And many courts might prefer to defer to the governing agency in interpreting the law the agency administrates.

This open-ended statute, of course, offered the FTC great leverage in its investigations and actions because its targets couldn’t effectively predict the likely scope of Section 5 of the FTC Act. This leverage can lead to forced settlements for targets that don’t know the standard by which the agency will judge them.

And the FTC had not issued any significant guidance about how it would enforce Section 5 of the FTC Act. It was clear to most people in the antitrust community that the Act was potentially broader than the Sherman and Clayton Acts—the traditional antitrust statutes—but the extent and scope were unclear.

(As an aside, the FTC does its antitrust enforcement through this FTC Act, even if it involves existing antitrust statutes, so the only real issue is how much broader is the FTC Act than the other antitrust statutes. The FTC refers to this as their “standalone” Section 5 authority).

The scope of Section 5 of the FTC Act was an important issue because when it comes to competition enforcement there is a very fine line between anticompetitive activity and strong procompetitive activity. Indeed, it isn’t always clear whether a particular type of business practice is either strongly procompetitive or actually anticompetitive.

So if Section 5 of the FTC Act is too broad it might deter conduct that in fact helps competition a great deal, which would undercut the purpose of the statute itself. This is a recurring problem for antitrust enforcement.

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NC Dental DecisionIf you haven’t yet heard, the Supreme Court upheld the FTC’s antitrust action against North Carolina’s state dental board. And I think they did a good job with the opinion.

We wrote an amicus brief in this case and I have been studying these issues for years, so let me tell you some of my thoughts.

Justice Anthony Kennedy wrote the Court’s majority opinion and Justice Samuel Alito filed a dissent, which Justices Antonin Scalia and Clarence Thomas joined.

State Action Immunity Background

You can read a brief summary of the case here, but here is nutshell: The North Carolina dental board, consisting mostly of practicing dentists, took certain actions to keep non-dentists from offering teeth-whitening services in North Carolina. Noticing the blatant anticompetitive conduct, the FTC sued them under the federal antitrust laws.

The issue at the Supreme Court, however, wasn’t whether the conduct violated the antitrust laws or whether it was anticompetitive, which (in my view, the FTC’s view, and the Fourth Circuit’s view) it clearly was. The issue was whether the North Carolina State Board of Dental Examiners can use what is called the State-Action-Immunity doctrine as a shield from federal antitrust law.

To invoke state-action immunity (which is technically an exemption not an immunity), an entity must satisfy the Midcal test, which requires that it show (1) the state as a sovereign clearly articulated authority for the entity to engage in anticompetitive conduct; and (2) active supervision by the state as sovereign. Under prior case law, municipalities need only show the first requirement (we will discuss this point further below).

The issue in NC Dental v. FTC (link to the Court’s opinion) was whether state licensing boards must demonstrate active supervision as well as the first prong—clear articulation. NC Dental didn’t show active supervision, so if they must do so under law, their state-action-immunity defense fails. And that is what happened.

North Carolina State Board of Dental Examiners v. Federal Trade Commission

Significantly, the second line of Justice Kennedy’s opinion is “A majority of the board’s members are engaged in the active practice of the profession it regulates.” The opinion says a lot, but this core fact—competitors regulating competitors—is what ultimately matters.

After discussing the factual context of the case, the Supreme Court started its Section II—the legal background section—with the following line: “Federal antitrust law is a central safeguard for the Nation’s free market structure.” I expect that attorneys and judges will quote this line for years. You can compare it to the Court’s quote from National Society of Professional Engineers (which was originally from Standard Oil v. FTC): “The heart of our national economy long has been faith in the value of competition.”

Here is another good line from the same paragraph of NC Dental: “The antitrust laws declare a considered and decisive prohibition by the Federal Government of cartels, price fixing and other combinations or practices that undermine the free market.” So Justice Kennedy—the Court’s libertarian?—sets a positive free-market foundation.

There is, of course, a tension between the free-market policies of the federal antitrust laws and federalism. That, in fact, is what the state-action immunity doctrine is all about. Under federalism, “in some spheres [the States] impose restrictions on occupations, confer exclusive or shared rights to dominate a market, or otherwise limit competition to achieve public objectives.” So the Court’s task is to demarcate the line between the obligations of federal antitrust law and the states’ rights to depart from this free-market policy.

You can read more about this tension between federal antitrust law and federalism in an article I wrote with Luke Wake for Competition. In that article, we argue that the Court should apply a market-participant exception to state-action immunity. That is, if a state or local government engages in commercial competition rather than regulation, it should not be able to invoke the state-action immunity shield; it must play by the same rules as other competitors. As an aside, you might notice the Court’s language in NC Dental distinguishing between regulation and market-participants. I certainly noticed it.

In resolving the tension between federalism and federal antitrust law, the Court—as it did recently in Phoebe Putney—points out that state-action immunity, like other antitrust exemptions, is disfavored.

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NC Dental PictureThe US Supreme Court does not review many antitrust cases. So when they do, it is kind of a big deal for antitrust attorneys around the world.

On Tuesday, the Supreme Court heard oral arguments in North Carolina Board of Dental Examiners v. FTC, which addressed the scope of state-action immunity from antitrust liability. More specifically, the Court is reviewing whether a state licensing board must satisfy both prongs of what is known as the Midcal test to avoid antitrust scrutiny.

The first element, which everyone agrees applies, requires the defendant entity to show that the State “clearly articulated and affirmatively expressed” the challenged anticompetitive act as state policy. The Supreme Court is deciding whether state licensing boards are subject to the second element as well: whether the policy is “actively supervised by the State itself.” Municipalities and other local governments have a free pass from this second element, but private people and entities must satisfy the active supervision requirement.

So what is the big deal? If an entity—state or private—can show that state-action immunity doesn’t apply, it can violate the antitrust laws at will. It can grab consumer surplus for itself; it can exclude competition; it can behave under different rules than everyone else. And monopoly is quite profitable.

In NC Board of Dental Examiners v. FTC, a state-sanctioned dental board—composed of six licensed dentists, one licensed dental hygienist, and one public member—engaged in actions to exclude non-dentist teeth-whitening services. As you might recall, Bona Law filed an amicus brief in this case. You can learn about the case and our amicus brief here. Among other points, we argued that the Supreme Court should analyze the case as the Court outlined in American Needle, by reference to whether the units of competition—the independent decision-makers—are private. They are. We also advocated that the Supreme Court apply an active state supervision requirement with some teeth.

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BlackjackSo here’s an idea. Let me know what you think: A hedge fund or other investment vehicle centered on antitrust analysis.

I’ll explain.

As you might know, I am an antitrust attorney. And I write a blog on antitrust and competition law. So, as you may expect, I follow antitrust developments somewhat obsessively at times. As a result, I have a good sense of the practical antitrust implications of certain cases, investigations, or prospective mergers.

I don’t have a crystal ball or anything. Nor do I have any inside information. And since human beings—judges or agency officials—make the relevant decisions, nobody can actually predict what will happen.

But by now, I can review a complaint or a motion to dismiss or description of facts and have a good sense of the strength and risk of the antitrust issues. I think I also have a decent idea how the major antitrust agencies—the FTC and Department of Justice—focus their priorities and like to resolve investigations, cases, and mergers. Like I said, I can’t predict anything with certainty, but there is a high learning curve for antitrust (probably more than most specialties) and I’ve spent a lot of time and effort climbing that curve.

Enough about me—for now anyway.

Let’s talk about antitrust and company stock performance. The obvious scenario is a merger. Two companies, perhaps competitors, announce a merger or acquisition. It isn’t a dead-on-antitrust-arrival merger between the first and second leading companies in a product and geographic market that is easily defined. Instead, it is the sort of merger where the markets are somewhat complicated, perhaps in flux, and it isn’t entirely clear whether an antitrust agency will challenge it or a court will stop it.

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Dollar signWhen you are a law student, you don’t usually understand that most cases are just one of several business tools that are companies utilize to advance their interests in the marketplace.

You might think that cases are academic-like exercises that reach either trial or some appellate court (perhaps after a motion-to-dismiss or summary-judgment motion). One or the other party or both are seeking justice and will not rest until the case terminates. That’s not a surprise, really, because much of what you do in law school is read such cases. I guess that is why many law students want to become appellate attorneys.

But the reality is that—as much as lawyers like myself like to view the law through an academic lens—a lawsuit or threat of a lawsuit is often just a way for someone to seek leverage. The claim is real and is serious, but litigating the case to termination is usually a last resort. The best result is often a settlement—the earlier the better.

Lawyers don’t like to talk about that much because unless you are on a contingency fee an early settlement means less money for the attorney. But it is the truth; lawyers are not special, really. What we do in litigation is often just another business tool to advance our client’s position in the marketplace. There are exceptions, of course—cases where justice must be done—but most commercial litigation doesn’t fall into that category.

Most of commercial litigation is a negotiating tool.

And an antitrust claim is a particularly large (and effective) bat when it comes to leverage.

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By Jarod Bona and Aaron Gott

We filed an amicus curiae brief with the U.S. Supreme Court on behalf of We All Help Patients, Inc. in North Carolina State Board of Dental Examiners v. FTC, a federal antitrust case challenging anticompetitive conduct by professional-licensing boards.

Let us tell you a little bit about this interesting case.

The Antitrust Case

The North Carolina Board of Dental Examiners is composed of six licensed dentists, one licensed dental hygienist, and one “public member.” Dentists make a lot of money by offering teeth-whitening services. So when non-dentists started providing teeth-whitening services at a far lower cost, dentists started complaining to the Board about the lower-priced competitors.

Naturally, a Board made up of self-interested private parties had an incentive to do something about it. They began sending cease-and-desist letters to non-dentist teeth whiteners and even went so far as to ask shopping malls to not lease kiosks to teeth whiteners. It wasn’t clear, of course, that North Carolina law limited teeth-whitening services to dentists.

The Board’s actions were, in fact, a conspiracy to restrain trade. The members were competitors that acted in agreement to exclude other competitors. The conspiracy question was not at issue with the US Supreme Court.

The Federal Trade Commission, which has long advocated for “free and unfettered competition as the rule of trade” to protect consumers and economic liberty, issued an administrative complaint against the State Board and ultimately held that the Board engaged in anticompetitive conduct and the state-action immunity doctrine did not apply. The case made its way up through the Fourth Circuit—which agreed with the FTC—and finally to the U.S. Supreme Court.

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