Section 5 Guidelines Would Make the FTC Stronger and Better

I personally believe that a policy statement on Section 5 would be a very good thing for the Federal Trade Commission, especially over the long run.  I think it would strengthen the agency, renew its distinct sense of purpose, and clarify the jobs of the attorneys who enforce the competition laws on a day-to-day basis.  And so, while there is some possibility that Josh Wright & I may disagree on aspects of substance, on the principle of having a policy statement, we agree entirely.

In this post I’ll explain a few reasons why I think a policy statement is a good idea, and then give a very rough idea of what I think a good one would look like; space obviously forecloses full treatment.

First, I think a policy statement would very useful internally.  It can be natural to think, when you’re working at an agency, that the broadest discretion possible would be best.  Who wants rules?  Without any constraints, you can do what you want, and change your mind later, free from having to consult some policy statement written years ago.  In practice, however, I think limits can be, counter-intuitively, both empowering and clarifying, especially in day-to-day practice.

Consider asking a musician to “write a song” – that’s hard.  Ask him to write country, blues, or R&B – and suddenly it’s easier.  And it’s even easier to “write in the style of 1970s heavy metal” or “a piano ballad like Elton John.”

Lawyers, like musicians, actually don’t do well with too much discretion.  The Anticompetitive Practices division is sometimes in this position.  The division knows that, in theory, the FTC has the power to go beyond the Sherman Act – but how far, it doesn’t really know, because nobody does.  Instead of the blank page serving as an inspiration, it becomes a trap.  I think, for day-to-day work of the division, a policy statement would provide a framework for trying to decide in a clearer way whether a complaint is worth looking into or not.  I would expect this to become more valuable over time.

Relatedly, for the agency’s work, a policy statement could be a useful thing for litigation.  If the agency can stand up in appellate court and say, (1) here are our standards for Section 5, and (2) here’s why we think this firm violated them, that strikes me as much stronger than something along the lines of, “we didn’t like what this firm was doing so we trotted out section 5 to deal with it.”  The former position seems much more likely to get at least Skidmore deference, the latter position, judicial mockery.

Externally, and I’m sure others have said this, for those subject to Section 5 (and by this I suppose I mean just about every business other than common carriers) a policy statement would obviously eliminate some uncertainty, particularly if the agency repudiated some of the wilder visions of what section 5 covers.   For example, I think the FTC could and should walk away from:

  • The “regardless … of its effect on competition” line in Sperry & Hutchison.
  • The “deconcentration” policy pursued in Kellogg.
  • Challenges to methods of operation or manufacturing (such as, for example, questionable tax practices that give an advantage, or something like failing to comply with minimum-wage laws).
  • Any targeting of pure parallel pricing.

The third beneficiary is the agency itself. The FTC has something of an identity problem.  Right now, the FTC’s Bureau of Competition is close to a copy of the Justice Department, minus the criminal element; the agency would be stronger with a clear identity of its own.  Of course, the consumer protection business helps distinguish the agency, but a Section 5 policy statement would help clarify what makes the agency distinctive in the competition sphere.

In a strange way the culprit here is the Sherman Act.  Having the Sherman Act jurisprudence to rely on has made the FTC somewhat lazy about developing its own jurisprudence and vision, the way it was supposed to.  Once upon a time it was unclear whether the FTC would have the power to enforce the Sherman Act at all; that surely would have forced the FTC to develop a clearer vision of what Section 5 meant.  Obviously I don’t see the FTC giving up on the Sherman Act – but it could use the policy statement to give some sense of what the FTC stands for.

* * *

These are the reasons I think a policy statement is a good idea.  What would an ideal policy statement contain?  On this, of course, there is more I’d like to say than I have room for.

I favor an approach that emphasizes elements and categories.  I think the FTC should require two elements in any section 5 case, namely: (1) unfair methods and (2) harm to competition or the competitive process.  Unfair methods is an actus reus, or conduct element, familiar to lawyers, and means conduct that is in some way deceptive, collusive, coercive, predatory, exclusionary, or otherwise oppressive.

While it’s at it, the agency should make clear, also, some of its criteria for deciding whether to bring a case – like its relative institutional expertise, the prospects of follow-on litigation by private plaintiffs, and the possibility of deference to other enforcement agencies or legal institutions.

In addition to elements, I think the Commission should create clearer categories that delineate what kind of Section 5 cases it will bring.  Three categories that come to mind are (1) conduct that violates the letter of the Sherman Act; (2) conduct contrary to the policy of the Sherman Act, though possibly beyond the letter; and (3) conduct that independently threatens the competitive process.  The third category is obviously the most interesting and open-ended, but I think it could be cabined by strict attention to the conduct and harm elements.  In particular, as in Section 2 cases, pro-competitive justifications would have to be taken very seriously.

There’s obviously much more to say, but I’ll end instead with a quote from Justice Cardozo about the FTC that I like.  “The careless and the unscrupulous must rise to the standards of the scrupulous and diligent. The Commission was not organized to drag the standards down.”

[originally posted at Truth on the Market].

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A Proposal for Review Articles in the Legal Academy

Law professors (and students) –

How legal scholarship might be improved is a subject of never-ending discussion.  Lately, I was thinking it would be useful to have more review articles in legal scholarship.  By this I mean papers which tried to objectively summarize the state of understanding surrounding a given topic, as opposed to presenting any new empirical findings, theories, observations, or insights.

Such articles are common in other fields, particularly in the sciences, where they are called review articles.  Such articles summarize or discuss the experimental results published by others, as opposed to reporting anything new.

Would these be useful for the law?  I think so.   There is so much legal scholarship published nowadays that it has become harder to keep track of what is going on, particularly for those even slightly outside of the field, let alone the bar or academics from other fields.   It is true that law articles often summarize their field in a “Part I” but that’s often brief and calibrated to the piece in question.

So here is what I mean in more detail:

-  A Law Review would establish a new category of article, called the “academic review”

-   It would solicit an established academic in the field to summarize the last few decades or so of scholarship in the field (or more if needed).  Examples might be “Patent theory” or “Empirical studies of the tort system” or “Criminal Punishment” or “Customary International Law.”

- The point of the piece would be to summarize the academic work done in the field over some relevant period, in a clear, relatively straightforward manner.

- The point would not be to summarize legal developments (i.e., new cases etc.) but rather theoretical or empirical contributions. This I think is an importance difference with hornbooks or continental scholarship.

- Bias would obviously be a potential problem, giving reason for multiple law reviews to commission different experts. In addition, excessive bias would hopefully be punished by reputational damage.

- The incentive to write such articles would come from the fact that they would probably be far more read than typical law review pieces, given how much ground they cover.  Also, summarizing a field can be quite fun.

- The review articles might also be a good way for good but less well-known or cited articles, or those that didn’t place well to gain deserved attention.   Stated otherwise, the review article could help minimize the effects of reputation and placement for how much attention a paper gets later.

- Two potential models for such pieces are the Harvard Law Review’s yearly invitation to some academic to write about the Supreme Court’s last term, and the commissioned articles that appear in the occasional legal encyclopedia.

- Tenured professors would be best situated to write review articles, both because of their experience and perspective, but also because current tenure standards tend to focus on original research.

-  While it is also generally true that review articles are today not highly valued in the legal academy, but the point of this proposal is to change that norm.

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A response to Gruber

The thesis of my recent piece on the comparative advantages of open / closed ecosystems was as follows.  Closed, centralized systems offer greater potential efficiencies, but open systems tend to lower error costs.    This suggests that a closed system has greater  potential, but that open systems are a safer choice in an environment of high uncertainty.

John Gruber’s recent critique of this piece  fails to address the error-cost theory just advanced.   Instead, he chooses to contest the idea that the choice of an open or closed ecosystem is relevant to determining the success of a product ecosystem.   He advances a rival hypothesis: “better and earlier tend to beat worse and later,” which comes close to being a truism.

Gruber is right about this:  no one factor can ever completely determine the success of a given product.   A million decisions go into product design, and reducing everything to one or two big factors is hazardous.  A badly built open product will never beat a good closed product, and vice-versa.   But the interesting  question is what happens when both are well-executed.

To deny the importance of a designer’s choice between a more open or closed system goes too far; saying that everything depends on timing and execution is to mistake tactics for strategy.   Perhaps we can best interpret Gruber as asserting that the relative importance of the choice can be exaggerated, and that execution — avoiding errors — matters as well (which puts him in agreement with my original piece).  He surely cannot be saying that the choice between open and closed doesn’t matter at all: that’s denialism.

The study of centralized and decentralized decision structures in an economic system is hardly my invention.   It goes back to classic economic debates between Oskar R. Lange and Fredrick Hayek in the 1940s.  Lange was an advocate of centralized planning and argued that closed / state-run economies would be more efficient than open / decentralized market economies.   Hayek, responding in 1945, argued that the advantage of an open system was largely informational.  A theoretically perfect central planner would, Hayek conceded, outperform an open system, but in a reality of imperfect information, the open market system could usually be expected to perform better.   There’s been much economic thought on the issue since that time, but I’ll skip it: the bottom line is simply that open and closed systems perform differently under different conditions and have differently strengths and weaknesses.  I should add that this kind of analysis is relevant for any system and any product ecosystem, not just tech — it is really the study of institutional design.

Fast forward to our present time and you can see the same open/closed dynamics that characterized the difference between planned and market economies reflected in tech markets.    iOS resembles a partially-planned economy.  It is a controlled ecosystem, which gives it certain advantages, but also greater rigidity and higher error costs.   In contrast, Android has some central planning as well, but exercises less total control.   Consequently Android is messier, but has certain advantages, like the ability to work on more devices.   Execution matters as well, and Apple’s products may be executed better, but both firms and the underlying device makers are all competent.   Android is ultimately  “worse and later” in Gruber’s terminology, yet, in defiance of his rule, successful nonetheless.  (Of course the final chapter on iOS v. Android isn’t written:  Android has more market share, but Apple makes much more profit).

While I’m an iPhone user, I actually don’t care so much whether Google and Apple wins; Gruber appears to have a more personal stake.  But the bottom line is that, as Michael Arrington points out, you really can’t pretend to understand what has happened over the last twenty years without some understanding of the relative advantages of open and closed systems  (or if you prefer, decentralized and centralized decision hierarchies.)  To maintain otherwise is an exercise in willful ignorance.

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No Updates while in Gov.

Man Restraining Trade

No updates while in gov.

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Reviews of THE MASTER SWITCH

Some reviews for the MASTER SWITCH

The New York Times “AT&T is the star of Wu’s book, an intellectually ambitious history of modern communications….”

The Washington Post “My pick for economics book of the year”

The Atlantic “Fascinating … a ripping yarn… But also a serious history with a strong view about the pernicious effect of monopolies and oligopolies in technology.”

Salon “For Internet pundits Wu’s book is required reading, but the average citizen may find it even more revelatory and rewarding.”

Amazon.com, A top Business book of 2010

Nature “In his groundbreaking book, The Master Switch, Columbia University law professor Tim Wu weaves together these and other examples to examine how disruptive tech- nologies enter and develop within society.”

The New Yorker, Reviewer’s Favorites 2010 “Finding patterns in the fates of information empires.”

Publisher’s Weekly (Starred Review) “Wu’s engaging narrative and remarkable historical detail make this a compelling and galvanizing cry for sanity–and necessary deregulation–in the information age.”

Fortune Magazine, A top book of 2010

Inside Higher Education “The Best Book of 2010″

Dallas Morning NewsA grim prospect indeed. But this time it’s different – maybe”

Forbes “[A] brilliant exploration of the oscillations of communications technologies between ‘open’ and ‘closed’ from the early days of telephone up through Hollywood and broadcast television up to the Internet era.”

Huffington Post “[M]asterful….fascinating…. a superstar in the telecommunications world…. Wu has a way of presenting complex and important concepts in a clear and understandable way….eminently readable…. a wealth of….fabulous anecdotes….a warning that we ignore at our peril.”

Toronto Star “His widely praised book charts the seemingly inexorable progress of this phenomenon through history, flattening one information industry after another — first telephones, then radio, film and TV.”

Kirkus Book Reviews (Starred Review) “Eye-opening reading, with implications for just about anyone….”

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Book Tour Stops with Links and Updates

New York:
Nov. 3: Columbia Law School
Nov. 4: Launch Party  (drumming video )
Nov. 7: Asian-American Writers Workshop PAGE TURNER
Nov. 11:  TedxEAST
Nov. 11:  With Ken Auletta at the CORE Club
6:30pm-8:15pm
To RSVP, please contact Victoria Collins at (202) 986-2700

or via email at collinsv@newamerica.net
Nov. 22: New York Incubator event
Nov. 30: Columbia Journalism School with Nick Lehman & Richard John, 7pm

Boston:
Nov. 5, Book Talk and Q&A, Harvard bookstore, Cambridge, MA
Jan. 9, Berkman Center

Los Angeles
Nov. 16, Zocalo Public Square

Bay Area
Nov. 17 Google Mountain View (1pm)
Nov. 17  The Commonwealth Club (2pm)
Nov. 18  Slate dinner

Seattle
Nov. 19, Town Hall Seattle with University Books
Nov. 19, Microsoft

Toronto
Dec 2, Ramsay Breakfast at the Fairmount Hotel

Washington D.C.
Oct 26 Slate Panel
Nov. 9 Office of Science & Tech Policy, White House
Dec. 9 D.C. Book Party
Nov. 30 Google DC

London
April, TBA

Austin
TBA

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Some Book Tour Stops

New York:
Nov. 4: Launch Party
Nov. 7: Asian-American Writers Workshop PAGE TURNER
Nov. 11:  New America Foundation event at the CORE Club
Nov. 30:  Columbia Journalism School

Boston:
Nov. 5, Book Talk and Q&A, Harvard bookstore, Cambridge, MA
Jan ~9, Berkman Center

Los Angeles
Nov. 16, Zocalo Public Square

Bay Area
Nov. 17, The Commonwealth Club
Nov. 18, Google

Seattle
Nov. 19, Town Hall Seattle with University Books
Nov. 19, Microsoft

Toronto
Dec 2, Ramsay Luncheons at the Fairmount Hotel

Washington D.C.
Oct 26 Slate Panel
Dec 9 TBA

Austin
TBA

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The Master Switch on Sale Nov 2

Buy it from one of these fine booksellers

Barnes & Noble

Indie-Bound

Amazon


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The Master Switch

Coming November —

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Net Neutrality Comments

I filed comments in the Net Neutrality proceeding.   From the first page:

* * *

I offer these comments to make three points.  First, there have been
tions in the media and elsewhere that the FCC’s proposed Net
Neutrality rules represent a radical departure in American federal
communications policy.  I’d suggest, from a historic perspective, that the
FCC’s Net Neutrality rule is rather mild.  In particular, it is far less
aggressive than the anti-discrimination laws imposed on carriers under the
Cleveland or Taft Administrations.

Second, many critics of the Proposed Rules have blurred the crucial
distinction between regulation of the Internet and the regulation of those
that carry Internet traffic.  I point out only that the latter, carriers, have
always been subject to regulation, as we shall, historically much stricter
regulation than that found in the Proposed Rules.

Third, I write to suggest that the FCC’s stated goal of protecting the
Internet as a platform for free speech will depend on how rigorously it
implements a ban on not only the blocking of content, but also on demands
for “Internet Payola.”

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