President Biden's executive order: a revolution in antitrust enforcement?
On July 9, 2021, President Biden issued the Executive Order on Promoting Competition in the American Economy. According to the fact sheet that accompanied the order, competition in the U.S. economy is in dire straits. The fact sheet presents a parade of economic horribles. In over 75 percent of U.S. industries, concentration is higher than 20 years ago. Markups have tripled. Advertised wages have decreased by as much as 17 percent. Tens of millions of construction and retail workers must sign noncompete agreements. Higher prices and lower wages cost the median U.S. household $5,000 per year. The rate of new business formation has fallen almost 50 percent since the 1970s. Productivity growth has slowed. Business innovation has declined. Income, wealth and racial inequality gaps have widened.
None of this is surprising. In fact, BakerHostetler hosted a webinar in which we cited similar statistics and predicted that they would serve as a rationale for bold Biden administration action on antitrust. But we didn’t know how bold. In the Executive Order, President Biden proposes a raft of initiatives at more than a dozen agencies to foster more competition across the economy. We italicize “proposes” because most of the initiatives are either reports or recommendations that do not carry the force of law. Nevertheless, the general intentions are pretty clear: more antitrust enforcement aimed at preventing anticompetitive mergers and certain forms of exclusionary conduct, and a focus on promoting competition for labor. Here are some specifics.
- The Executive Order establishes a White House Competition Council within the Executive Office of the President, composed of executive agency secretaries and the U.S. Attorney General. The FTC, the FCC and other interested agencies are also invited to participate. The council will supervise and coordinate the Biden administration’s push to address competition issues and is directed to propose legislation if it sees fit.
- As far as mergers are concerned, the Executive Order:
- Asks the FTC and the Department of Justice (DOJ) to review and, if needed, revise the Horizontal Merger Guidelines and Vertical Merger Guidelines.
- Asks the DOJ, in consultation with the Federal Reserve, the FDIC and the Comptroller of the Currency, to adopt a plan for “revitalization of merger oversight under the Bank Merger Act and Bank Holding Company Act of 1956.”
- Encourages the DOJ and the FTC, along with other agencies, to coordinate their investigation of mergers, acquisitions, and joint ventures and to seek input from interested agencies when considering remedies for anticompetitive deals.
- Encourages the Chair of the Surface Transportation Board to “determine whether a merger, acquisition, or other transaction involving rail carriers is consistent with the public interest under 49 U.S.C. 11323-25, [to] consider a carrier’s fulfillment of its responsibilities under 49 U.S.C. 24308 (relating to Amtrak’s statutory rights).”
- Expresses a concern about hospital consolidation, without offering any specific remedies.
- The Executive Order focuses on particular markets/industries: (1) labor, (2) third-party machinery repair, (3) information technology, (4) agriculture, (5) pharmaceuticals, (6) healthcare services, (7) telecommunications, (8) financial services, (9) commercial shipping, (10) rail freight and (11) beer/wine/spirits.
- The Executive Order takes a “whole-of-government” approach to competition policy and therefore directs the following agencies to produce reports to the White House Competition Council assessing competition issues within their jurisdiction: Department of Agriculture, Department of the Treasury, Department of Transportation, Department of Health and Human Services, Department of Commerce, Department of Defense and Department of Labor. In most cases, the agencies are asked to consult on the development of their reports with the Chair of the FTC.
- The Executive Order focuses on specific actions agencies should take, including directing, asking or encouraging:
- Various agencies to review and rescind regulations that unnecessarily inhibit competition by either creating significant barriers to market entry or promoting market concentration.
- The Attorney General and the secretary of commerce to consider revising their “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”
- The FTC and the DOJ to consider revising their October 2016 Guidelines for Human Resource Professionals, which expresses the agencies’ views on wage-fixing and no-poach agreements. Relatedly, the Executive Order recommends that the FTC use its rule-making authority under the Federal Trade Commission Act to “curtail” non-compete and similar employment contract agreements. This is consistent with the recent Antitrust Division focus on criminal wage-fixing and no-poach investigations and cases and with the state and federal trend disfavoring non-compete and non-solicitation clauses that we have written about before.
- The FTC and other agencies to consider regulations curbing (a) “restrictions on third-party repair or self-repair of items,” such as farming equipment, and (b) pharmaceutical industry conduct and agreements that delay the market entry of generic drugs and biosimilars.
- The FCC to consider adopting net neutrality rules and rules prohibiting “unjust or unreasonable early termination fees for end-user communications contracts, enabling consumers to more easily switch providers.”
- The Department of Transportation to develop rules, bring enforcement actions and issue guidance to “ensur[e] that [airline] consumers are not exposed to advertising, marketing, pricing, and charging of ancillary fees that may constitute an unfair or deceptive practice or an unfair method of competition.”
- The secretary of Health and Human Services to submit a report with a plan “to combat excessive pricing of prescription drugs” and act to promote price transparency for hospital and other healthcare provider services, in support of the No Surprises Act of 2021.
- The CFPB to promulgate rules under the Dodd-Frank Act to facilitate the portability of consumer financial transaction data “so consumers can more easily switch financial institutions and use new, innovative financial products.”
Naturally, the Executive Order focuses heavily on the antitrust agencies, the FTC and the DOJ. As noted, the order asks the DOJ and the Chair of the FTC to reconsider the scope of certain guidelines. However, the Executive Order offers no guidance on substantive revisions to these guidelines. (And the Executive Order does not mention the FTC/DOJ Antitrust Guidelines for the Licensing of Intellectual Property.)
Note above the specific reference to the “Chair” of the FTC, as if the other commissioners are not involved in the promulgation of these guidelines. But when it comes to FTC competition rulemaking, the President explicitly encourages the entire commission, not just the Chair, to consider his recommendations. First, the President recommends a competition rule curtailing the use of non-competes and other clauses that may limit worker mobility. This is set off separately from other rulemaking recommendations, perhaps for emphasis. The additional rulemaking recommendations relate to unfair data collection and surveillance that may harm competition, restrictions by manufacturers that prevent farmers from repairing their own equipment; agreements to delay market entry in the pharmaceutical industry by generic and biosimilar suppliers, unfair competition in the Internet marketplace, unfair occupational licensing restrictions, and unfair tying and exclusionary practices in real estate brokerage.
The Executive Order suggests that the President is in a hurry to intensify competition across U.S. industries, asking agencies to complete competition-related reports in short order, almost always less than a year. Perhaps the most important question is how much the DOJ and the FTC can accomplish over the next year or even over the next decade.
The FTC made a similar effort to push the frontiers of antitrust and consumer protection enforcement in the 1970s. The ground was littered with failures. Recently, the FTC changed certain of its rulemaking procedures on the consumer protection side, which prompted Commissioner Christine Wilson to file a dissent, in which she harked back to how the agency almost did not survive the 1970s counterattacks on our “national nanny.” According to Commissioner Wilson, “Congress sought to cabin the agency’s discretion even more than [the commission’s own procedural retreats in its rulemaking] in what famed legal scholar Ernest Gellhorn characterized as ‘The Wages of Zealotry.’”
Commissioner Wilson did not report on the setbacks the FTC suffered on the competition side during that era. They are worth revisiting. The commission instituted two shared monopoly test cases, one against oil companies and another against cereal companies. Neither was successful. The FTC also issued several competition complaints that were beyond the scope of the Sherman Act by using its authority under Section 5 of the FTC Act. In theory, such cases were within the commission’s power. According to the Supreme Court in FTC v. Sperry & Hutchins Co., Section 5 “empowers the FTC to define and proscribe an unfair competitive practice, even though the practice does not infringe either the letter or the spirit of the antitrust laws.” However, the FTC did not fare well when respondents appealed a series of Section 5 administrative decisions to the courts. The central concern of the courts, according to a leading antitrust treatise, was that “the FTC’s expansive reading of Section 5 failed to establish adequate standards by which firms could order their business.” For example, in Official Airline Guides v. FTC, the court overturned the FTC’s judgment because the conduct at issue was outside the market in which the respondent competed.
After a series of such decisions, the FTC pulled back and, at least in our memory, has not rendered any judgment in administrative litigation that relied exclusively on an expansive reading of the antitrust provision in Section 5. In 2015, the commission announced a narrow scope for its powers under Section 5. That policy statement was withdrawn within days of Lina Khan becoming FTC Chair.
The Executive Order’s recommendation to the FTC to use rulemaking to address competitive problems suggests that the Biden administration is resisting the more leisurely pace of case-by-case adjudication. In a law review article, two of the FTC’s present commissioners, Lina Khan and Rohit Chopra, recommended this rulemaking path. The FTC has issued an antitrust rule only once, and it was a rather obscure rule, later withdrawn. The two commissioners argue, however, that case-by-case analysis, using antitrust’s rule of reason, is too complicated for courts and also that such adjudications have unduly limited impact. They propose using competitive rulemaking under two circumstances. First, if there is an extensive enforcement record, they propose using a rule to cut off never-ending litigation. They offer pay-for-delay or reverse payments in Hatch-Waxman settlements as an example. The second circumstance is one in which private litigants are unlikely to challenge the anticompetitive conduct. They offer, as an example, non-compete clauses in employment contracts. They explain that there is no private litigation in this area because employers include forced arbitration clauses and class action waivers in employment contracts. Not surprisingly, the Executive Order encourages the FTC to make rules covering both of these examples.
The commissioners’ law review article does not address in any detail how the commission should analyze the competitive concern that prompted the rulemaking. Can the commission abandon the rule of reason when making competition rules? Is a rule justified if the anticompetitive effects do not outweigh the procompetitive effects? Let’s briefly attempt to apply the rule of reason to the non-compete clauses in employment contracts. Consider a large, well-known fast-food chain that has such non-compete clauses. The clauses are vertical in nature because they are between the franchisor or franchisee and its employees, and not between competitors. In such a circumstance, the first step a plaintiff would have to take is to prove that the employer has market power. It seems unlikely the FTC would succeed in establishing that even a very large franchisor/employer has market power, as it will have only a small market share in the employment market. But even if the plaintiff or the commission satisfies its burden of proof in the first step, the respondent or defendant can attempt to justify its restraint on efficiency grounds. In this case, the respondent would likely assert that it invested in training the employee and the investment would be lost if the employee could be readily poached. Having offered a more-than-presentable justification, the burden of proof would shift back to the plaintiff to establish a less restrictive alternative that accomplishes the procompetitive objective. While there is an alternative—employee reimbursement for the costs of training—it is doubtful that such alternative is much less restrictive.
Will a court of appeals allow the rule to stand if the FTC could not win a case against a single defendant? Would the court accept an argument that might not get much traction in an individual litigation—that in aggregate, the non-colluding employers have market power? If anything, over the past several decades, the courts have become more conservative on antitrust issues than they were in the 1980s, when they struck down decision after decision where the FTC attempted to expand its antitrust reach.
So it would be easy to predict that the courts will rein in the commission’s aggressive efforts. But that may be of little solace to companies that get caught up in investigations by an even more determined DOJ and FTC. This is particularly problematic when it comes to mergers, because time is not necessarily on the merging parties’ side if the merger remains unconsummated for long. This suggests that greater thought needs to be given to how to share the antitrust risk and other workarounds in purchase agreements. It also suggests that it is time for companies to revisit all aspects of antitrust compliance. While the courts may slow down the antitrust agencies, the Biden administration and the antitrust agencies have one important thing going for them: For the first time in a very long time, there is substantial bipartisan recognition in Congress that stronger antitrust rules are needed. This might trump everything else.
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