T-Mobile's CDMA Network Sunset Did Not Harm Competition

My July 7 blog post covered most of the misleading and regurgitated evidence alleged by plaintiffs in Dale v. Deutsche Telekom AG, a private antitrust lawsuit challenging the T-Mobile/Sprint merger. I left for this blog a separate discussion about one particular claim: The Dale plaintiffs claim – wrongly – that T-Mobile's early sunsetting of Sprint's CDMA network harmed competition by stifling DISH Network's chances to succeed in entering the wireless market. But rapid migration to next-generation mobile networks benefit consumers with more capacious, speedy, and reliable services.

Because that's a mouthful, let's first understand the facts. As a condition of the T-Mobile/Sprint merger, the DOJ Antitrust Division required T-Mobile to spin off Sprint's largest mobile virtual network operator (MVNO) brand, Boost Mobile, to DISH. The purpose of this spinoff was to facilitate DISH's entry into the mobile broadband market. Combining the acquired MVNO brand with its own network infrastructure potentially would enable DISH to take Sprint's place as the fourth largest facilities-based mobile broadband provider. Boost Mobile had roughly 9.3 million subscribers at the time the merger consummated, so transferring it to DISH gave DISH a pool of customers to kickstart its business.

 

Most of Boost Mobile's customers relied on Sprint's antiquated CDMA network, an inferior legacy technology inadequate for the provisioning of 5G service. Sprint's continued reliance on CDMA technology is one of the many reasons it struggled as a company. CDMA is incompatible with "GSM," the higher quality network technology used by T-Mobile, AT&T, and Verizon. Some former Sprint customers and most of Boost Mobile's customers had old CDMA-only devices that could not connect to GSM networks. Upon the CDMA network sunset, these devices would become useless for those customers, and those customers would need to buy new phones to continue receiving service. In other words, Boost Mobile customers were hemmed in by Sprint's prior bad business decision in selecting CDMA technology that was finally facing its demise.

But as Free State Foundation Director of Policy Studies Seth Cooper explained in an August 2021 Perspectives from FSF Scholars, T-Mobile's choice to sunset the 3G CDMA network it acquired improved mobile broadband service quality for nearly every T-Mobile customer. Knowing this result would be likely, the FCC's 2019 order approving the T-Mobile/Sprint merger declined to require T-Mobile to continue CDMA network operations. Notably, T-Mobile or Boost customers would enjoy the benefits of the network sunset if they upgraded their devices.

Enter the Dale complaint. The Dale plaintiffs allege that T-Mobile sunset its CDMA network earlier than it previously indicated to sabotage DISH's chances at successfully entering the mobile broadband market. In their view, the CDMA sunset forced the customers DISH acquired from Boost Mobile to buy new devices, making them highly vulnerable to "churn" or "switching" to another provider. With DISH then hemorrhaging customers, its revenues would sink and its costs would increase, making it more difficult to construct a nationwide 5G network. And this supposedly would make T-Mobile's settlement commitments to sell network services to DISH meaningless, because DISH's mobile business would quickly lose its customers, making it dead-on-arrival. The complaint then points to the fact that DISH cut an eventual network services agreement with AT&T instead of T-Mobile as more evidence of T-Mobile harming competition.

But the Dale claimants ignores two critical facts. First, the terms of DISH's network usage agreement with AT&T appear to be better than its original agreement with T-Mobile. The contract with AT&T is for a duration of 10 years, while T-Mobile's agreement with DISH is for a duration of 7 years. And the deal does not appear to have increased costs for DISH. The Dale plaintiffs might contend that, even if DISH got a better deal with AT&T, T-Mobile's CDMA sunset still harmed competition by rendering DISH customers' devices useless because AT&T does not have an active CDMA network.

That hypothetical criticism would fall short because of the second critical fact. T-Mobile and DISH resolved their dispute over the CDMA sunset and inked a new, lower-priced network services agreement in which T-Mobile agreed to assist with transitioning Boost Mobile customers to GSM-capable devices. Thus, even if upgrading to next-gen mobile network technology could be conceived as cognizable consumer harm, T-Mobile's agreement with DISH alleviated that harm. Indeed, T-Mobile's CDMA sunset improved mobile broadband service for virtually every customer, likewise increasing network quality competition.

In view of the facts, the complaint in Dale shows an absence of harm and a benefit to consumers. Antitrust claims with no harm and real benefits to consumers are not viable.

Antitrust law is supposed to protect competition, not competitors. Yet far too often, the crux of arguments made by antitrust claimants is harm to particular competitors. Of course, certain types of harm to particular competitors can harm competition, if there is evidence that it leads to market price increases and output reductions. But in this case, harm is nowhere near clear given the pro-competitive benefits from sunsetting legacy technologies and expanding next-generation technologies.

Under the Dale plaintiffs' ideal version of competition, T-Mobile's network infrastructure and financial resources would have been conscripted to maintain an outdated technology to the advantage of a competitor. This would have slowed 5G network deployment and made T-Mobile customers worse off. The plaintiffs in Dale should have difficulty in convincing a court to side with claims that are based on such a skewed view of competition.

Realizing the benefits of next-gen networks requires that old legacy technologies be timely sunset. For the good of consumers, 5G networks have rapidly been deployed across the U.S. DISH still has a shot to become the fourth nationwide facilities-based 5G provider, and its recent announcement that its 5G network is available to more than 20% of the US population indicates that it may be on pace.

Misleading Evidence in Private Antitrust Suit Against T-Mobile/Sprint Merger

Dale v. Deutsche Telekom AG, a recent class action antitrust lawsuit filed in the Northern District of Illinois, alleges that the T-Mobile/Sprint merger harmed consumers by causing price increases. The Dale complaint largely rehashes arguments brought by state attorneys general that Judge Victor Marrero rejected back in 2020, but it also hangs its hat on new misleading evidence: the claim that the Consumer Price Index's "quality-controlled prices" for wireless telephone services have increased since the consummation of the merger.

The problem with that argument is that the CPI's "quality-controlled prices" do not control for quality improvements brought by 5G service.

Currently, the CPI records changes in wireless telephone plans from 4G networks to 5G networks, but does not quality adjust for these changes. The CPI continues to observe the changes in customer access of 5G networks to determine if quality differences can be quantified.

So, the tiny price increases that the CPI measured in late 2020 do not account for the increased quality brought by 5G service. That's a serious problem for the plaintiffs in Dale, because one of the reasons Judge Marrero approved the T-Mobile/Sprint merger was that he found it likely to expedite the rollout of 5G service. To that point, he seems vindicated, as OpenSignal's periodic "5G Report" repeatedly has found that T-Mobile's 5G network is delivering on its commitments and has improved on its past performance levels. So, if the CPI actually adjusted for improved quality from 5G service, it might not show price increases at all.

As a matter of antitrust law, it would be strange to find that the company with the highest-performing and continually improving network is suppressing competition. And as a reminder, antitrust law does not prevent businesses from increasing prices for improved service.

Also, since a brief small spike in late 2020, wireless prices have resumed their downward trend, and are nearing their all-time low on the CPI. Likewise, wireless telephone services are one of the only goods or services measured by the CPI currently decreasing in nominal price despite 40-year-high inflation. As I wrote in May, wireless telephone prices decreased by .7% between April 2021 and April 2022. Inflation during that period was 8.3%, so during the same time, real wireless prices decreased by 9%.

Evidence of improved 5G service quality, recent wireless price decreases, and additional evidence of increasing broadband competition – all of which Free State Foundation scholars included in their 2022 Communications Marketplace Report comments – will be hard for the Dale plaintiffs to overcome.

In Eyebrow-Raising Fashion, FTC Adopts New Policy Statement on Prior Approval Provisions

Last week, the FTC finally filled the vacuum it created this summer when, in a vote along party lines, it rescinded the 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases (1995 Policy Statement). The new Policy Statement, perhaps unsurprisingly, heralds a worrisome return to, and expansion upon, pre-1995 practices shown to discourage pro-competitive transactions. Equally newsworthy, however, are the departures from traditional process associated with this agency action.

Prior to 1995, the Commission routinely required that consent decrees include an obligation that the combined entity provide advance notice of, and obtain prior approval for, subsequent transactions in the relevant product and geographic markets. The 1995 Policy Statement put an end to that practice.

However, and as I detailed in a July 23, 2021, post to the FSF Blog, at the FTC's July Open Commission Meeting, the agency's Democratic majority opted to rescind the 1995 Policy Statement. The two Republican Commissioners articulated their concerns about that decision.

Commissioner Noah Phillips characterized prior approval provisions as "a decade-long M&A tax on anyone who enters a merger consent" and decried the inconsistency of the majority's action with the intent of the Hart-Scott-Rodino Act of 1976 (HSR Act). He also argued that the resumed use of such provisions will create competitive disparities between those subject to consent decrees and those not so constrained – and, as a consequence, "lead to suboptimal transactions, create inefficiencies, and reduce overall consumer welfare."

Commissioner Christine Wilson explained how prior approval conditions create opportunities for "questionable exercises of enforcement discretion"; emphasized that, even with the 1995 Policy Statement in place, the FTC retained the ability to require prior notice and/or approval in consent decrees under warranting circumstances; and highlighted that "by rescinding the 1995 Policy Statement without providing further guidance, the Commission substitutes uncertainty for a policy that has worked for more than 25 years."

That void now has been addressed, but decidedly not in a manner to the liking of either Republican Commissioner.

On October 25, 2021, the FTC announced the adoption of a new Prior Approval Policy Statement (2021 Policy Statement). Per the Press Release, "merger enforcement orders will once again require acquisitive firms to obtain prior approval from the agency before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of ten years." Prior to 1995, prior approval provisions remained in effect for a maximum of ten years.

In addition, per this expanded policy, the agency may require prior approval for:

• Transactions outside of the affected product and/or geographic markets when, based upon the application of a "non-exhaustive" list of subjective factors, it concludes that "stronger relief is needed";
• In instances where the parties abandon the proposed deal; and
• For the sale of divested assets by entities not involved in the challenged transaction.

Thus, the 2021 Policy Statement in significant ways is much more expansive than those practices in place prior to 1995.

Although there currently is a 2-2 split between Democratic and Republican Commissioners on the Commission, Chair Lina Khan and Commissioner Rebecca Kelly Slaughter were able to push through the 2021 Policy Statement with the assistance of a tie-breaking "zombie vote" cast weeks prior by former Commissioner Rohit Chopra.

However, that is not the only procedural anomaly that transpired.

While a Dissenting Statement from Commissioners Phillips and Wilson eventually was released, on October 29, 2021, it notably was not included in the initial announcement.

As a result, Commissioner Phillips took to Twitter to voice his displeasure:

The Commission issued this ill-advised policy without giving minority commissioners a promised opportunity to issue a simultaneous dissent, as has always been the practice. ⁦@CSWilsonFTC⁩ and I will issue a statement later, as planned. https://t.co/KkQLbFzdTy

— Noah J. Phillips (@FTCPhillips) October 25, 2021

Commissioner Wilson weighed in, as well:

Simply stunning.

Strong dissent forthcoming. https://t.co/bHFpxOJmOC

— Christine S. Wilson (@CSWilsonFTC) October 25, 2021

For more on Commissioner Wilson's general process-related concerns, please read "Congressional Testimony of FTC Commissioner Wilson Addresses Agency Processes, Section 13(b), and Federal Privacy Legislation," a July 2021 post to the Free State Foundation's blog.

Eventually, the official FTC Twitter account issued a mea culpa:

The Office of Public Affairs unfortunately issued the prior approval policy release prematurely and plans to update immediately upon receipt of the dissenting statement from minority Commissioners. We regret the error.

— FTC (@FTC) October 25, 2021

Nevertheless, in a footnote to their joint Dissenting Statement, Commissioners Phillips and Wilson reiterated that "[t]he policy at issue was announced without our participation, which is contrary to longstanding practice and the opposite of what was promised."

Moving to the substance of their objections, Commissioners Phillips and Wilson dismissed the 2021 Policy Statement as "yet another daft attempt by a partisan majority of commissioners to use bureaucratic red tape to weigh down all transactions – not just potentially anticompetitive ones – and to chill M&A activity in the United States."

In addition, they:

• Pointed out the various ways, noted above, in which the 2021 Policy Statement goes even further than pre-1995 practices;
• Detailed how the 2021 Policy Statement stands in conflict with procedures set forth by Congress in the HSR Act;
• Explained how "the majority oversells the benefits of its actions and significantly undersells the harms";
• Highlighted how this action further exacerbates the growing disparity between how the FTC and the Department of Justice review transactions; and
• Criticized the majority's failure to seek public input before finalizing the 2021 Policy Statement.

I urge you to read the Dissenting Statement of Commissioners Phillips and Wilson in its entirety. It can be accessed here.

FTC Commissioner Phillips' Recent Comments on Changes to Transaction Review Process, Proper Focus of Antitrust Law

In a series of recent posts to the FSF Blog, I have highlighted instances where the two Republican FTC Commissioners, Noah Phillips and Christine Wilson, have voiced concerns regarding changes to the process by which the agency reviews transactions.

Appearing on a panel at the Technology Policy Institute's just-concluded Aspen Forum 2021, Commissioner Phillips was afforded an opportunity to expand upon his recent public statements. His remarks were noteworthy.

When asked to assess the performance of Lina Khan during her first two months as FTC chair, Commissioner Phillips responded in relevant part that:

There are some changes being made that I think are good things. I like the concept of open meetings. I think it's good to show the public … who we are and what we're doing. 

There are some changes that I don't like as much…. Something that I said recently is I'm concerned that some of the policies we're adopting are essentially aimed at undoing the Hart-Scott-Rodino merger review legislation. That was a piece of legislation adopted by the Ford Administration in 1976 and it has been one of the great "win-wins" in antitrust law over the decades. 

Businesses got an answer to their question and didn't have to waste a lot of money. Government enforcers got a chance to look at transactions before they happened, and didn't have to deal with hostile judges who didn't want to "unscramble the eggs." And it's been really good to give the opportunity to the government to review mergers, to give answers to businesses, and, ultimately, and this is the point, to help consumers.  

But I fear that some of the steps we're taking now will make that process less effective and less efficient and less fair. And so there are certainly some things we're doing … that I'm not a fan of. It's early days, and we'll see what happens.

In response to a question regarding the FTC's merger-review backlog, Commissioner Phillips stated the following:

What I will say is that we have deliberate and public policies right now of holding off on making decisions. So, for example, we adopted a policy, and … this was under Acting Chair Slaughter, when companies sought early termination … for deals that were non-problematic, that no one had an issue with, companies used to be able to come to the government and say, "Hey, you're not interested in this, can we just go ahead and do it?" And now we're saying, "No, you can't. You just have to wait. Not for any reason. Just because." That, to me, adds some needless friction to markets.

Another example, we announced a policy that in more cases we're going to be demanding of companies to give us prior approval rights for future mergers in our consents. And one thing I fear here is that this is just going to make doing consents harder. Resolving things ahead of time harder. 

Now I know a lot of people are worried that consents don't work well. And I know people don't want to say, "Yes," they don't want to say, "Yes, I'm ok with this merger." But the whole congressional scheme from 1976 forward depends upon the ability of the agencies to get things done. Sometimes we  sue… sometimes we go to court. But in order to bring those cases, we're going to have to resolve others. And I just worry that we are needlessly impeding our ability to do so.

Later in the discussion, Commissioner Phillips made a comment very much in line with a July 2021 Perspectives from FSF Scholars critical of calls to expand the focus of antitrust law beyond the relatively narrow "consumer welfare" standard that has prevailed for half a century.

In "Failure Everywhere? The Expansion of Goals for Antitrust," Timothy Brennan, Professor Emeritus, School of Public Policy, University of Maryland-Baltimore County (UMBC) and a member of the Free State Foundation's Board of Academic Advisors, argued that attempts to achieve too much through antitrust law in actuality are likely to produce the opposite result:

Expanding the range of goals to pursue with antitrust may end up not only doing a poor job protecting consumer welfare, but also will impede achieving the equity, employment, fairness, and other social objectives motivating the critics of traditional antitrust ….

In responding to moderator Tom Lenard's question whether the United States has a "serious and growing market power problem," Commissioner Phillips made a similar point:

What I do think … is a problem in some of the discussion that … everyone is having is that almost everything that people view as negative, either that a particular firm is doing, or that they see in society, let's say, the redistribution of wealth from labor to capital, they tag as a problem of market power. So: company does a bad thing, you will see infinite number of people on Twitter talk about how, if we had competition, we wouldn't have that. 

My question is, "Why? Why do we assume that's true?" If, in fact, the thing that we're seeing would not be the result of normal competition, there I think you have an argument. But there are times when bad things happen, and the cause of that is not a lack of competition. And so the solution of antitrust will not lead to better results….

And so one of the concerns that I have … about introducing all of these new features, especially ones that aren't naturally borne out by the competitive process, which is why we have regulation: to solve those externalities where the market won't. One of my concerns is, if you're trying to solve everything at once, you'll solve nothing at all.

Commissioners Phillips, Wilson Object to FTC's Rescission of Policy Statement on Prior Approval and Prior Notice Merger Provisions

At its July 21, 2021, Open Commission Meeting, the FTC voted along party lines to rescind its 1995 Policy Statement Concerning Prior Approval and Prior Notice Provisions in Merger Cases (1995 Policy Statement).

When it adopted the 1995 Policy Statement, the FTC abandoned what had become routine practice: requiring that transacting parties agree to obtain prior approval, and/or provide advance notice, of future acquisitions within the relevant product and geographic markets.

As a result of this substantial departure from longstanding policy, there is widespread concern that the FTC will expand significantly its exercise of authority over the merger and acquisition activities of companies that enter consent orders with the agency.

The two Republican Commissioners have made their objections to this action known. Commissioner Noah Joshua Phillips issued a Dissenting Statement and Commissioner Christine Wilson posted the text of her oral remarks to the FTC's website "[t]o facilitate transparency."

*    *    *

After objecting to the majority's decision to rescind the 1995 Policy Statement "with the minimum notice required by law, virtually no public input, and no analysis or guidance," Commissioner Phillips set forth two substantive criticisms in his Dissenting Statement.

First, he argued that, by once again broadly subjecting merging companies to prior approval and/or notice provisions, "the majority chooses to impose a decade-long M&A tax on anyone who enters a merger consent." This, he maintained, will discourage companies from entering consent decrees and, in turn, "abrogate" the Hart-Scott-Rodino Act of 1976, which "Congress enacted … to protect the public from anticompetitive mergers and acquisitions before they occur."

With the 1995 Policy Statement no longer in place, Commissioner Phillips concluded that "companies will be less likely to work with the Commission to resolve competitive concerns – contrary to the express purpose of the HSR Act, and leading to less efficient merger enforcement. As consent negotiations become more difficult, we will have to go to court more – wasting precious taxpayer dollars, and accomplishing less."

Second, he argued that "[a] blanket policy of routinely requiring prior approval" unreasonably will place at a competitive disadvantage those subject to consent decrees, as they "may have to bid higher … to compensate the seller for the uncertainty and the longer lead time required to obtain prior approval."This, in turn, will lead to suboptimal transactions, create inefficiencies, and reduce overall consumer welfare.

*    *    *

Commissioner Wilson offered three primary reasons for her opposition to the agency's decision to rescind the 1996 Policy Statement. First, she questioned why the majority chose to remove this important "guardrail to prevent … questionable exercises of enforcement discretion."

Commissioner Wilson pointed out that the 1995 Policy Statement was implemented "following nearly nine years of highly resource-intensive litigation undertaken by the FTC against an abandoned transaction" involving the Coca-Cola Co. (Coke) and the Dr Pepper Company that "some observers viewed … [as] a punishment for Coke's temerity to exercise its legal rights and litigate."

By contrast, a contemporaneous attempt by PepsiCo, Inc. to acquire Seven Up Co. was abandoned without a fight when the agency voted to challenge it – that is, without a legal challenge – and therefore did not lead to the imposition of a prior approval order.

Questioning the "purported rationale" put forth by the majority – that the justification for rescinding the 1995 Policy Statement "lies in saving agency resources that it would otherwise spend to review a transaction the Commission previously considered" – Commissioner Wilson expressed her concern "that the Commission intends to revert to the vindictive approach that led to the nine-year litigation against Coke" and "fear that rescinding the policy statement is being sold to the public under false pretenses."

Second, Commissioner Wilson highlighted the fact that, even with the 1995 Policy Statement in place, the FTC could, and often did, incorporate prior approval and/or notice provisions into consent decrees under certain scenarios, such as "where there [was] a credible risk that a company would attempt the same or approximately the same merger" or "would engage in an otherwise unreportable anticompetitive merger."

Raising doubts as to "whether rescission of this policy will facilitate further constructive use of" such provisions and echoing the sentiment of Commissioner Phillips, she expressed her fear that instead "it will facilitate a massive end-run around Hart-Scott-Rodino ('HSR') filing requirements and, for mergers subject to prior approval provisions, a shifting of the burden of proof that will chill procompetitive deals and hurt consumers." Such a drastic step, she argued, should only be taken by Congress.

Third, Commissioner Wilson agreed with Commissioner Phillips that, "by rescinding the 1995 Policy Statement without providing further guidance, the Commission substitutes uncertainty for a policy that has worked for more than 25 years." In that regard, she noted that this action will create a conflict between the FTC and the Department of Justice's Antitrust Division, which takes a similar approach to prior approval provisions as the FTC did pursuant to the 1995 Policy Statement.

Commissioner Wilson also took issue with the majority's decision to rescind the 1995 Policy Statement without first seeking input from the public, a step the FTC did take prior to its adoption.

*    *    *

Finally, I would be remiss if I didn't mention that Commissioner Phillips and Commissioner Wilson both participated in a Fireside Chat with FSF President Randolph May in March as part of the Free State Foundation's Thirteenth Annual Telecom Policy Conference. Video of that wide-ranging discussion is available here.

Unsolicited Advice for FTC Chair Khan

By Richard J. Pierce, Jr., the Lyle T. Alverson Professor of Law at George Washington University and Member of the FSF Board of Academic Advisors

New FTC Chair Lina Khan has not sought my advice, but here it is. In his July 9 Executive Order, President Biden described an antitrust agenda that he wants the FTC and the other agencies with antitrust responsibilities to implement. His agenda consists of 72 major changes in competition law. Any agency that attempts to implement an agenda that includes that many major changes in law at the same time is doomed to failure. No agency has the resources required to implement an agenda that ambitious. Chair Khan and her colleagues need to choose no more than half a dozen parts of the president’s agenda to pursue immediately.

The FTC can begin the prioritization process by deferring pursuit of the long list of changes in law that Chair Khan proposed in her famous student Note and her first meeting as Chair. I described some of those changes in my July 1 essay[1] and my July 3 essay.[2] The Supreme Court would reject those changes because they are inconsistent with the approach to antitrust law that the Court has pursued for fifty years. Absent enactment of a statute that clearly compels the Court to reject everything that it has said and done for half a century and to head in a direction that it has long rejected, pursuit of any of those proposed changes would produce nothing but headlines followed by judicial rejections. 

There are five changes in law in President Biden’s list that the FTC has been attempting to make for many years, with limited success in court. I described those proposed changes in my July 12 essay.[3] The FTC should continue to pursue those socially-beneficial changes, but with the understanding that they are long-term goals. The FTC is unlikely to succeed in persuading the courts to acquiesce in most of those changes during President Biden’s first term in office.

 

 

The FTC’s number one short-term goal should be to eliminate most of the non-compete clauses in employment contracts. President Biden emphasized the severity of the problems caused by non-compete clauses in the speech that he made when he announced his antitrust agenda. As he noted, they now exist in about 30% of employment contracts, including contracts for employment as a hamburger flipper in a fast food restaurant. They inflict significant harm on employees by prohibiting them from taking jobs that would improve their pay or working conditions.

Non-compete clauses significantly impair the performance of the labor market by limiting the role of competition. They are responsible for a significant part of the large gap between our constantly increasing labor productivity and our stagnant wage levels. That gap has grown over the past thirty years. They also have contributed to the vast gaps in our income and wealth that have increased dramatically in recent years.

The Supreme Court’s June 21 opinion in NCAA v. Alston provides powerful evidence that the Court would be receptive to an FTC campaign to outlaw most non-compete clauses. The Justices made it clear that they unanimously support efforts to improve the performance of labor markets. They are prepared to hold unlawful any anticompetitive practice that employers adopt as a means of artificially depressing wages. Noncompete clauses fit that characterization perfectly.

There is a large body of scholarship, including excellent empirical studies, that documents the severe adverse effects of noncompete clauses on the performance of labor markets. There is no evidence that they have offsetting social benefits in most contexts. The FTC staff has already gathered and analyzed most of the evidence it needs to launch a successful campaign against non-compete clauses. It hosted an excellent workshop on the subject in 2019.[4]

Elimination of most noncompete clauses would also benefit consumers by improving the performance of markets for goods and services. Small firms and startups cannot compete effectively with the large firms that now dominate many markets unless they can hire some of the experienced workers that work for the large established firms. Noncompete clauses preclude them from being able to lure those workers away from the market incumbents, thereby crippling their efforts to succeed in entering a market and thriving in that market. Because of non-compete clauses, a new market entrant cannot succeed even if it would be able to offer a superior product or service if it could hire experienced workers.

The FTC should exercise caution in two ways if it decides to prioritize elimination of most non-compete clauses. First, the FTC should not overreach substantively. Most employers have no chance of proving that their noncompete clauses further any socially beneficial purpose. In a few narrow contexts, however, there is some theoretical and empirical support for the argument that noncompete clauses yield net social benefits. Thus, for instance, noncompete clauses may produce net benefits in the context of high-paid scientists and senior executives who have unique access to a firm’s trade secrets. The FTC should focus initially on the goal of eliminating noncompete clauses in the contracts of low-paid employees.

Second, the FTC should not overreach procedurally. The FTC will be tempted to rely on the D.C. Circuit’s opinion in National Petroleum Refiners v. FTC,[5] to support issuance of rule that bans noncompete clauses in most employment contracts. In that opinion, the court held that the FTC can use notice and comment rulemaking to issue a rule that implements section five of the FTC Act. The FTC should resist that temptation. The D.C. Circuit’s 1973 opinion was based on a type of reasoning that no court has used in decades, and courts have always been reluctant to uphold FTC actions that are based solely on section five. The Supreme Court is virtually certain to overrule the D.C. Circuit precedent if the FTC tries to rely on it.[6] I can even predict the language the Court would use to overrule that opinion. In 2019, the Supreme Court overruled a 1974 D.C. Circuit precedent with this explanation: “National Parks’ contrary holding is a relic from a bygone era of statutory interpretation.”[7]

It would be a shame if the FTC went through the lengthy and resource-intensive notice and comment process only to have the Supreme Court reject its work product on procedural grounds. The FTC can easily accomplish the goal of eliminating most noncompete clauses by using a combination of procedural tools and substantive authority that it has long used and that courts have long accepted. It can issue a statement of enforcement policy in which it announces, explains, and supports with solid evidence, its policy of banning most noncompete clauses. It can then initiate one or more high visibility, well-chosen enforcement actions in which it finds that the noncompete clauses in the employment contracts of the low-paid employees of a particular firm violate the Sherman Antitrust Act. By using that approach, the FTC can implement one of President Biden’s most important goals in a relatively short period of time.

---

[1] Richard Pierce, Fasten Your Seatbelts, the FTC Is About to Take Us on a Rollercoaster Ride, Notice & Comment (July 1, 2021).

[2] Richard Pierce, Questions for Proponents of Major Changes in Antitrust Law, Notice & Comment (July 3, 2021.)

[3] Richard Pierce, The Biden Antitrust Agenda, Notice & Comment (July 12, 2021).

[4] See Richard Pierce, The U.S. Federal Trade Commission Workshop on Noncompete Clauses, 23 Utilities Law Reports (2020).

[5] 482 F. 2d 672 (D.C. Cir. 1973).

[6] See Richard Pierce, The Rocky Relationship Between the Federal Trade Commission and Administrative Law, 83 G.W. L. Rev. 2026 (2015); Thomas Merrill & Kathryn Watts, Agency Rules with the Force of Law: The Original Convention, 116 Harv. L. Rev. 467 (2002).

[7] Food Marketing Institute v. Argus Leader Media, 139 S.Ct. 2356, 2364 (2019).

[This blog is cross-posted at the Yale Journal on Regulation Notice and Comment website.]

 

 

Questions for Proponents of Major Changes in Antitrust Law

By Richard J. Pierce, Jr., the Lyle T. Alverson Professor of Law at George Washington University and Member of the FSF Board of Academic Advisors

Over the past two months, proponents of major changes in antitrust law have introduced numerous bills in Congress that have some degree of bipartisan support. One of the leading proponents of major changes, Lina Khan, is now Chair of the FTC. On July 1, Chair Khan announced major changes in the FTC’s policies and procedures that are explicitly intended to implement major changes in antitrust law with or without Congressional action. These developments make it important to get answers to some questions about the goals and potential effects of the proposed changes.

For fifty years, the Supreme Court, the FTC and the Department of Justice have attempted to interpret and apply the broad language of the existing antitrust statutes in ways that are intended to maximize consumer welfare. This has produced a mix of doctrines in which a few practices, like horizontal minimum price fixing and horizontal allocation of markets, are illegal per se because the courts and enforcement agencies believe that they often have bad effects and rarely have good effects. However, most practices are subject to a rule of reason.

When a practice is subject to the rule of reason, the party who claims that the practice is having bad effects on consumer welfare has the initial burden of proving that the practice is actually having bad effects. If the plaintiff[s] satisfy that burden, the defendant[s] then have the burden of proving that the practice is having good effects on consumer welfare that exceed the bad effects. The rule of reason is based on the belief that most practices can have bad effects in some market conditions and good effects in other market conditions.

 

 

Many scholars believe that antitrust law has not been as effective in maximizing consumer welfare as it should be and can be. There are constant debates about ways in which courts and enforcement agencies can make antitrust law more effective and improve its performance as a means of improving consumer welfare.

Chair Khan and the members of Congress who are sponsoring the bills that are now pending in the House and Senate have a completely different agenda. They want to abandon pursuit of the goal of maximization of consumer welfare. They also want to replace the rule of reason with a long list of rules that prohibit firms from engaging in many practices, either in all circumstances or when firms that are above a particular size attempt to engage in the practices.

The first question these initiatives raise is: what is the new goal of the new version of antitrust law that they propose? The proponents of major change explicitly reject the goal of maximization of consumer welfare, but they are not clear about the alternative goal that they want to further. They refer to a wide variety of goals that include: improving the welfare of workers, protecting the viability and profitability of small businesses, reducing the economic power of large firms, and reducing the political power of large firms.

Every time I teach antitrust law, I walk my students through the effects of the efforts that the antitrust enforcement agencies and the courts made between 1890 and the 1970s to further each of these alternative goals. The conclusion that I long ago reached and that most of my students embrace is that it is impossible for antitrust law to further any one of its potential goals without sacrificing pursuit of the others. As a practical matter, the courts and enforcement agencies must either adopt a single goal, or a hierarchy of goals, so that they can then make rational choices about the extent to which we should pursue one goal while sacrificing pursuit of the others.

I have not yet seen any writing in which one of the proponents of major changes in antitrust law has taken the logical first step of identifying the new goal or hierarchy of goals that they would substitute for the present goal of maximization of consumer welfare. Once the proponents take that essential step, they need to explain how their many proposed per se rules would further the new goal or hierarchy of goals.

The proponents should start by explaining how their proposed per se prohibition on predatory pricing will be implemented. Predatory pricing is not a practice that is easy to identify. The practice that triggers concern about predatory pricing is selling a good or service at a price so low that the firm’s competitors object. In most circumstances, low prices have enormous socially-beneficial effects. However, predatory pricing refers to low prices that a firm intends to charge only for a period long enough to drive all of the firm’s competitors out of business in order to allow the firm to earn monopoly prices by charging high prices and reducing the quantity of the good or service that the firm sells.   

For decades, antitrust enforcement agencies and courts engaged in aggressive efforts to identify and to punish predatory pricing. The results were not attractive. When a firm angered its competitors by charging low prices, its competitors often filed an antitrust complaint in which they alleged that the firm was engaged in predatory pricing. In many cases, they would even persuade one of the enforcement agencies to file such an action. The defendants knew that they would suffer major economic losses even if they were successful in defending their actions because of the high cost of engaging in antitrust litigation.

The easiest way for a defendant to resolve a claim of predatory pricing was to “settle” the case by entering into an agreement to increase its prices to a level at which they no longer posed any threat to their competitors and to agree not to reduce its prices in the future. If that sounds to you like the creation of a price-fixing cartel, the problem is not in your perception. Of course, the best course of action for any firm that wanted to avoid becoming a defendant in a predatory pricing case was to refrain from charging prices so low that its competitors objected. It could do that by increasing its prices any time that its competitors complained and threatened to file a predatory pricing action.

Over a period of decades, the enforcement agencies and the courts reached agreement that the aggressive position that they had taken in their efforts to eliminate predatory pricing was having serious adverse effects in the form of encouraging firms to charge high prices and deterring them from engaging in competition based on price. After several decades, the Supreme Court announced a new test applicable to claims of predatory pricing that is hard for a complaining party to satisfy. It coupled that new test with antitrust standing rules that make it difficult for competitors to maintain an action against a firm based on a predatory pricing theory. The Court made it clear that it was taking these steps based on its beliefs, supported by the findings of many scholarly studies, that: predatory pricing is rarely attempted; predatory pricing is rarely successful when it is attempted, and; the low prices that trigger claims of predatory pricing are socially desirable.

Before we embark on a new crusade to eradicate predatory pricing, it would be nice to see an explanation of how that new effort will avoid the unintended adverse effects of our prior efforts and to see studies that find that predatory pricing is a common practice that is often successful in allowing a firm to reduce its output and to charge artificially high prices—the primary adverse effects of monopoly.

[This blog is cross-posted at the Yale Journal on Regulation Notice and Comment website.]