The FTC’s Uneasy Relationship With Innovation

The Sherman and Clayton Acts form the backbone of U.S. antitrust policy. But another piece of legislation gives the government the power to regulate business practices on scales smaller than monopoly. In 1914, President Woodrow Wilson signed the Federal Trade Commission Act into law, which created the FTC. In particular, section 5 of the FTC Act  should give pause to America’s entrepreneurs. It states:

“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices… are hereby declared unlawful.”

Deceptive business practices should be, and are, illegal. Fraud has been against the law for a long time. The worrying part is the term “unfair methods of competition,” which the law never defines.

Congress could have enumerated which business practices were to be made illegal, but it chose not to. FTC Commissioner Joshua Wright, in a recent policy statement, cites (p.3) a Senate Committee Report on the 1914 FTC Act noting “that there were too many unfair practices to define, and after writing 20 of them into the law it would be quite possible to invent others.” So Congress delegated its lawmaking authority over to the new FTC.

Its primary reason for doing so was a then-fashionable Progressive Era emphasis on scientific, expert management. Congressmen, being generalists, lack the specialized knowledge that full-time agency employees have. Since the agencies know better, they should be given wide discretion as to defining what constitutes an unfair business practice.

A public choice theorist might add that delegation also allows Congress to shift blame away from itself when FTC actions prove unpopular. Delegation could also give members plausible deniability if the FTC decides to punish businesses for political or ideological reasons.

Commissioner Wright’s policy statement attempts to give more clarity to what business practices the FTC will and will not allow, and he even addresses some public choice concerns. Some of his major principles:

  • Consumer harm is the rationale for antitrust policies, not competitor harm.
  • Maintaining the competitive process is more important than maintaining certain individual competitors.
  • The FTC is not allowed to punish businesses to advance public policy goals. It may only intervene for economic reasons, such as when the competitive process is in danger.
  • An unfair business practice will have the effect of “increased prices, reduced output, diminished quality, or weakened incentives to innovate.” (p.7)

He goes on to provide several examples of business practices that are and are not allowed.

Wright also cites a wise quote from Ronald Coase, who won the economics Nobel in 1991. It neatly sums up the antitrust enterprise:

“[If] an economist finds something – a business practice of one sort or another – that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation, frequent.”

Coase’s observation has consequences for the tech sector, which relies heavily not just on new, continuously evolving technologies, but on new business practices that haven’t been tried before. Without a prior track record of how a practice works, it is difficult for the defendant to prove that it increases efficiency, or or for the plaintiff to prove it is anti-competitive. The result is a lot of legal uncertainty in a sector that already has more uncertainty than most.

Hopefully Wright’s efforts to clarify the FTC’s muddled enforcement criteria will bear some fruit. Until then, watch out, especially if you’re a tech company trying out new, untested business practice. As Coase has warned, It may come back to haunt you.