An implacable Lina Khan fended off four hours of hostile questions from members of the House Judiciary Committee, who criticized her ethics and performance as FTC Chair and then proceeded to attack FTC career staffers, each other, and Congress itself at a grueling oversight hearing on July 13. Accusations of mismanagement, cover-ups, conflicts of interest, and partisanship made good theatre and national news, but a potentially devastating development for the FTC went almost unmentioned and unreported.

Midway through the hearing, the headline of the day was revealed by Rep. Cline (R-VA), who reported that the House Appropriations Committee had just voted to cut the Commission’s budget by 25 percent. The reduction, he said, was the consequence of the FTC’s misguided enforcement and disdain of Congress. If the budget proposal survives, it would mean massive layoffs and gutted programs at the Commission.

The hostilities came as no surprise, given the Committee’s preview of the hearing as an examination of “mismanagement of the FTC and its disregard for ethics and congressional oversight under Chair Lina Khan.” And if you follow our blog, Ad Law Access, you know that at the last Oversight and Appropriations hearings, members aired similar grievances. But unlike other hearings, the tension between members of the Committee and dissatisfaction with Khan were extraordinarily front and center.

Along with the drama (which we will leave to other reporters) members of the Committee raised many substantive concerns that are bound to affect FTC policy and activity. So without further ado, here is our rundown of the issues on the House Judiciary Committee’s radar and the Chair’s responses:

Opening Remarks

Committee Chair Rep. Jordan (R-OH) minced no words while describing Khan’s approach to antitrust reform as a “disaster” and a “costly” departure from decades of bipartisan consensus. He attacked her approach to big tech and the methods by which the FTC has demanded information during investigations.

Ranking Member Rep. Nadler (D-NY) was quick to come to Khan’s defense, touting the FTC’s return of $430 million to consumers in the past year. He praised the agency for pronouncing the “party” over for irresponsible corporations. This was the real reason, he said, that his Republican Colleagues were taking aim at the agency.

Khan’s opening remarks focused on the FTC’s initiatives and accomplishments, including major merger challenges, antitrust actions for farmers and small businesses, proposed rules against non-compete clauses and junk fees, scrutiny of dark patterns, and a major judgment for kids’ privacy. The FTC, she said, was guided by a North Star of preventing dangerous concentrations of private power, and she assured the committee that the agency “was firing on all cylinders.”

A Brief Ethics Undercard

Before the committee could delve into the FTC’s record, members carped at Khan and each other over ethical concerns. First up was Khan’s refusal to recuse herself from matters involving companies and practices she had criticized in the past. Rep. Hageman (R-WY) asked why the Chair had not recused herself from a matter after an FTC ethics official recommended she do so. Khan explained that the recommendation had left the decision to her, since the law did not require recusal.

Committee Democrats rushed to Khan’s defense by attacking the FTC official who had advised her. For good measure, Rep. Buck (R-CO) suggested that Congress itself could be bought, railed against lobbyists and think tanks that defended big tech, and fingered prominent members of the House and Senate for connections with the tech sector while managing legislation to reign it in. Khan relaxed during the members’ contretemps and took several opportunities to defend the integrity of the ethics official and other FTC staffers. Eventually the personal slights subsided without apparent effect.

Competition Cases Failing in Court

When the hearing moved to substance, critics pounced and defenders retreated. Just two days earlier, a Biden-appointed federal judge had thrown out the FTC’s effort to enjoin the Microsoft-Activision merger, which prompted Rep. Kiley (R-CA) to describe Khan as 0-for-4 record in merger trials in Federal Court and to ask her, “Why are you losing so much?…Are you losing on purpose?” He suggested the answer might lie in a New York Times article quoting Khan explaining the benefits of losing in court. Losses, she said, could signal to Congress the need for new antitrust laws.

Rep. Kiley also attacked the FTC’s plan to appeal the Microsoft decision, which he predicted would be upheld, and to spend more taxpayer dollars pursuing the action in front of an FTC administrative law judge. Khan responded by recalling the Commission’s prosecution of Martin Shkreli, the pharmaceutical executive notorious for price gouging. She did not have an answer for the merger losses, beyond praise for her intrepid but outnumbered trial lawyers. Hardly a member was heard rising to her defense.

Rep. Issa (R-CA) accused Khan of turning the FTC into a bully that would make America less competitive. Also citing the failed case against Microsoft, he argued that FTC challenges were undermining American companies that had to compete worldwide. FTC overreach could ultimately end up hurting consumers, Rep. Issa argued, pointing to another case in which the FTC ordered that Illumina divest cancer detection test maker GRAIL. This, he said, could frustrate the development of life-saving technology.

Expanding on the theme of overreach, Rep. Fitzgerald (R-WI), Rep. Johnson (R-LA), Rep. Van Drew (R-NJ), and Rep. Biggs (R-AZ), all asked about statements by FTC Commissioner Rebecca Slaughter that the Commission would apply an “equity focus lens” on its competition policy agenda while incorporating antiracist thinking into anti-trust law. Was it wise to protect interest groups instead of consumers? Khan declined to speak for Slaughter, but the members pressed. Would Khan require merger approvals to be contingent on companies’ ESG (environmental, social, and corporate governance) principles? Was there a gender lens to antitrust? Did she agree with a senior staffer quoted as saying that merger policy was industrial policy and that startups should go public rather than get acquired? Khan endorsed none of it, committed to following the law, and emphasized that factors outside of the statutes are irrelevant to the Commission.

Switching to offense, Khan repeated her oft-expressed criticism of her predecessors’ antitrust enforcement, claiming that for decades the government had been allowing markets to consolidate and competition to erode. It was under-enforcement that was making it difficult for domestic firms to compete internationally, she maintained. Inadequate antitrust was even threatening national security, she contended, citing concentration of military contractors.

But Khan would not explain what standard she applied to enforcement. Rep Bentz (R-OR), pointing to her rejection of the consumer welfare standard, asked her what approach she followed. She responded that she followed the law. He wanted to hear more than the law. What was the standard? She referred him again to the statutes and the Commission’s Policy Statement on Unfair Methods of Competition (which has been criticized for eschewing an overarching policy). Notably, she did not remind him of concentration prevention, the North Star she had claimed as her guide in her opening statement.

Rep. Lee (R-FL), apparently not persuaded by denials that social engineering was affecting law enforcement, asked why the new premerger notification rules were demanding so much information that it would take a hundred more hours to prepare a notice and why merging companies’ now had to report on their labor relations and employee demographics. He did not seem impressed with her answer that asking for more information up front would obviate subsequent inquiries. A wider net would open up more avenues for investigation while raising costs across the board that small businesses could least afford.

Khan had another chance to address policy when Rep. McClintock (R-CA) asked her for her view of capitalism? She answered that we enforce laws. Asked again for her view, she denied that it was the role of government to interpose in market decisions. It is the FTC’s job to protect markets and their participants, she said. The agency’s role is to be the referee. Her responses in these policy dialogs reflect a more modest role for the Commission than it has suggested in the past.

Rep. Jordan grilled Khan on the investigation of Twitter, which he called harassment. The exchange gave her an easy opening and she took advantage of it with a predictable response. First she recounted Commission allegations against Twitter, then she denied any impropriety, and finally she rose to the defense the career staff of the Commission. Attacks on pending investigations seldom gain traction, and this one was no exception.

But Khan could only promise to do better when members turned to her treatment of FTC staff. Rep. Cline bemoaned the resignations of Commissioner Philips and Wilson and reports that dispirited FTC staffers had departed in droves, including 71 senior attorneys leaving in 2021 to 2022. Rep. Fry (R-SC) also raised the annual Federal Employee Viewpoint Survey, which found that the percent of FTC employees who strongly agreed that the senior leaders “maintain high standards of honesty and integrity” had dropped from 57.6% in 2020 to 22.5% in 2022. Until her arrival, FTC scores typically topped the rankings. Members wanted to know what Khan was doing to improve morale. She admitted to management mistakes early in her tenure, and reported corrections such as streamlining decision making and holding more meetings with staff.

Bipartisan Support for Data Privacy

In one of the rare moments of bipartisanship, both Rep. Buck and Rep. Gaetz (R-FL) raised concerns about American’s data privacy and the lack of regulation around data brokers. Khan agreed with the need for national legislation and also noted the FTC’s filing of an amended complaint against data broker Korchava, which allegedly sold Americans’ sensitive personal information. Rep. Bishop (R-NC) asked about the CID recently issued to OpenAI. Khan refrained from addressing it specifically, but she expressed general alarm over AI chatbots accumulating and disseminating a huge trove of data without any quality checks, potentially leading to misinformation, libel, and disclosure of people’s sensitive information. None of the members disagreed.

Rulemakings

Members gave mixed reviews of the rulemaking activity at the FTC, with the consumer protection rules faring better than the first competition rule of Khan’s tenure:

• Non-competes – Rep. Johnson asked whether it was fair to prohibit a small business from protecting its investment in employees by preventing them from jumping to competitors. Rep. Bishop, who once litigated employment contracts, reflected on the variety of state rules that had evolved over the centuries to address non-compete clauses. Khan, he said, would displace them with one national rule. Her concern about concentration in business did not seem to apply to concentration of legal power. Khan assured him that the rulemaking had to observe extensive procedural protections. She expressed eagerness to seeing the feedback from comments to the proposed rule, which you can read more about here.
• Motor Vehicle Rule – Relying on an outside expert’s report, Rep. Hunt (R-TX) expressed concern that the proposed Motor Vehicle Rule would cost $38 billion over 10 years. Khan committed to examining the evidence. You can find the proposed rule here.
• Click-to-Cancel – Khan addressed concerns of members, such as Rep. Cohen (D-TN), whose constituents are bombarded with unwanted subscriptions offers and renewals by explaining the proposed Click-to-Cancel Rule that would require services to make cancelling a subscription as easy as signing up for it. You can read more about the proposed rule here.
• Junk Fees – while touting successes during her tenure, Khan referenced the proposed rule on junk fees and addressed concerns from Rep. Balint (D-VT) about dark patterns, which you can also read more about here.

Consequential Conversations

Chair Khan may have delivered the line that best sums up the oversight hearing when she explained how losing in court could reap benefits in Congress for the FTC. She characterized the history of antitrust as a series of conversations among prosecutors, courts and lawmakers.

Nobody, not even Khan, denied that the conversation between the FTC and the courts has gone poorly for the Commission under her leadership.

As it became painfully obvious over the course of the hearing, the conversation with Congress is not faring much better. Although she received praise, some of it bipartisan, for some of the Commission’s efforts, criticism outweighed compliments, and Khan did not rebut much of it. Indeed, she often declined to engage with member’s questions, choosing instead to resort to anodyne evasions that reinforced their suspicions.

On occasion, friendly members came to her defense. Ethical attacks failed to register, and consumer protection garnered more praise than rebuke. But too often on competition policy, she left her inquisitors frustrated with vagaries that gave her supporters little to work with.

Disputes in courts typically reach clear and quick resolutions in the form of judgments and orders. Indeed, a day after the Commission noticed its appeal in the Microsoft-Activision case, the Ninth Circuit summarily rejected it.

In Congress, consequences percolate more slowly, but they can be much more momentous, as the FTC may soon discover. While Khan jousted with Judiciary members, ominous signals of a crisis for Commission issued from a sedate House Appropriation Committee. In the GOP controlled House, the agency is facing the prospect of a 25 percent budget cut, rather than the one-third increase it requested. Beyond the budget cut, the funding bill would corral the Bureau of Competition and erase Khan’s signature initiative – her redefinition of unfair methods of competition. Among other restrictions, the bill provides:

• Not more than $165,000,000 shall be for the Bureau of Competition;
• None of the funds made available for the Bureau of Consumer Protection shall be reprogrammed to the Bureau of Competition; and
• No funds may be used to implement, administer, or enforce the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition.”

Of course, the budget is far from settled. The Commission has plenty of time and another chamber to avoid the worst. In the Senate, the situation is not dire; appropriators have voted to give the agency enough funds to cover inflation. But as the bidding now stands on Capitol Hill, the FTC stands somewhere between a massive budget cut and the status quo. That is a perilous place to be.

Other members in attendance included Rep. Lofgren (D-CA), Rep. Scanlon (D-PA), Rep. Johnson (D-GA), Rep. Massie (R-KY), Rep. Ivey (D-MD), Rep. Roy (R-TX), Rep. McBath (D-GA), Rep. Tiffany (R-WI), Rep. Bush (R-MO), Rep. Spartz (D-IN), Rep. Gooden (R-TX), Rep. Schiff (D-CA), Rep. Jayapal (D-WA), Rep. Neguse (D-CO), Rep. Dean (D-PA), Rep. Ross (D-NC), and Rep. Moran (R-TX).

* * *

That’s our summary for now. Stay tuned as we continue to track updates from the FTC.

“Why are you losing so much? Are you losing on purpose?”

An implacable Lina Khan fended off four hours of hostile questions from members of the House Judiciary Committee, who criticized her ethics and performance as FTC Chair and then proceeded to attack FTC career staffers, each other, and Congress itself at a grueling oversight hearing on July 13. Accusations of mismanagement, cover-ups, conflicts of interest, and partisanship made good theatre and national news, but a potentially devastating development for the FTC went almost unmentioned and unreported.

Midway through the hearing, the headline of the day was revealed by Rep. Cline (R-VA), who reported that the House Appropriations Committee had just voted to cut the Commission’s budget by 25 percent. The reduction, he said, was the consequence of the FTC’s misguided enforcement and disdain of Congress. If the budget proposal survives, it would mean massive layoffs and gutted programs at the Commission.

The hostilities came as no surprise, given the Committee’s preview of the hearing as an examination of “mismanagement of the FTC and its disregard for ethics and congressional oversight under Chair Lina Khan.” And if you follow our blog, Ad Law Access, you know that at the last Oversight and Appropriations hearings, members aired similar grievances. But unlike other hearings, the tension between members of the Committee and dissatisfaction with Khan were extraordinarily front and center.

Along with the drama (which we will leave to other reporters) members of the Committee raised many substantive concerns that are bound to affect FTC policy and activity. So without further ado, here is our rundown of the issues on the House Judiciary Committee’s radar and the Chair’s responses:

Opening Remarks

Committee Chair Rep. Jordan (R-OH) minced no words while describing Khan’s approach to antitrust reform as a “disaster” and a “costly” departure from decades of bipartisan consensus. He attacked her approach to big tech and the methods by which the FTC has demanded information during investigations.

Ranking Member Rep. Nadler (D-NY) was quick to come to Khan’s defense, touting the FTC’s return of $430 million to consumers in the past year. He praised the agency for pronouncing the “party” over for irresponsible corporations. This was the real reason, he said, that his Republican Colleagues were taking aim at the agency.

Khan’s opening remarks focused on the FTC’s initiatives and accomplishments, including major merger challenges, antitrust actions for farmers and small businesses, proposed rules against non-compete clauses and junk fees, scrutiny of dark patterns, and a major judgment for kids’ privacy. The FTC, she said, was guided by a North Star of preventing dangerous concentrations of private power, and she assured the committee that the agency “was firing on all cylinders.”

A Brief Ethics Undercard

Before the committee could delve into the FTC’s record, members carped at Khan and each other over ethical concerns. First up was Khan’s refusal to recuse herself from matters involving companies and practices she had criticized in the past. Rep. Hageman (R-WY) asked why the Chair had not recused herself from a matter after an FTC ethics official recommended she do so. Khan explained that the recommendation had left the decision to her, since the law did not require recusal.

Committee Democrats rushed to Khan’s defense by attacking the FTC official who had advised her. For good measure, Rep. Buck (R-CO) suggested that Congress itself could be bought, railed against lobbyists and think tanks that defended big tech, and fingered prominent members of the House and Senate for connections with the tech sector while managing legislation to reign it in. Khan relaxed during the members’ contretemps and took several opportunities to defend the integrity of the ethics official and other FTC staffers. Eventually the personal slights subsided without apparent effect.

Competition Cases Failing in Court

When the hearing moved to substance, critics pounced and defenders retreated. Just two days earlier, a Biden-appointed federal judge had thrown out the FTC’s effort to enjoin the Microsoft-Activision merger, which prompted Rep. Kiley (R-CA) to describe Khan as 0-for-4 record in merger trials in Federal Court and to ask her, “Why are you losing so much?…Are you losing on purpose?” He suggested the answer might lie in a New York Times article quoting Khan explaining the benefits of losing in court. Losses, she said, could signal to Congress the need for new antitrust laws.

Rep. Kiley also attacked the FTC’s plan to appeal the Microsoft decision, which he predicted would be upheld, and to spend more taxpayer dollars pursuing the action in front of an FTC administrative law judge. Khan responded by recalling the Commission’s prosecution of Martin Shkreli, the pharmaceutical executive notorious for price gouging. She did not have an answer for the merger losses, beyond praise for her intrepid but outnumbered trial lawyers. Hardly a member was heard rising to her defense.

Rep. Issa (R-CA) accused Khan of turning the FTC into a bully that would make America less competitive. Also citing the failed case against Microsoft, he argued that FTC challenges were undermining American companies that had to compete worldwide. FTC overreach could ultimately end up hurting consumers, Rep. Issa argued, pointing to another case in which the FTC ordered that Illumina divest cancer detection test maker GRAIL. This, he said, could frustrate the development of life-saving technology.

Expanding on the theme of overreach, Rep. Fitzgerald (R-WI), Rep. Johnson (R-LA), Rep. Van Drew (R-NJ), and Rep. Biggs (R-AZ), all asked about statements by FTC Commissioner Rebecca Slaughter that the Commission would apply an “equity focus lens” on its competition policy agenda while incorporating antiracist thinking into anti-trust law. Was it wise to protect interest groups instead of consumers? Khan declined to speak for Slaughter, but the members pressed. Would Khan require merger approvals to be contingent on companies’ ESG (environmental, social, and corporate governance) principles? Was there a gender lens to antitrust? Did she agree with a senior staffer quoted as saying that merger policy was industrial policy and that startups should go public rather than get acquired? Khan endorsed none of it, committed to following the law, and emphasized that factors outside of the statutes are irrelevant to the Commission.

Switching to offense, Khan repeated her oft-expressed criticism of her predecessors’ antitrust enforcement, claiming that for decades the government had been allowing markets to consolidate and competition to erode. It was under-enforcement that was making it difficult for domestic firms to compete internationally, she maintained. Inadequate antitrust was even threatening national security, she contended, citing concentration of military contractors.

But Khan would not explain what standard she applied to enforcement. Rep Bentz (R-OR), pointing to her rejection of the consumer welfare standard, asked her what approach she followed. She responded that she followed the law. He wanted to hear more than the law. What was the standard? She referred him again to the statutes and the Commission’s Policy Statement on Unfair Methods of Competition (which has been criticized for eschewing an overarching policy). Notably, she did not remind him of concentration prevention, the North Star she had claimed as her guide in her opening statement.

Rep. Lee (R-FL), apparently not persuaded by denials that social engineering was affecting law enforcement, asked why the new premerger notification rules were demanding so much information that it would take a hundred more hours to prepare a notice and why merging companies’ now had to report on their labor relations and employee demographics. He did not seem impressed with her answer that asking for more information up front would obviate subsequent inquiries. A wider net would open up more avenues for investigation while raising costs across the board that small businesses could least afford.

Khan had another chance to address policy when Rep. McClintock (R-CA) asked her for her view of capitalism? She answered that we enforce laws. Asked again for her view, she denied that it was the role of government to interpose in market decisions. It is the FTC’s job to protect markets and their participants, she said. The agency’s role is to be the referee. Her responses in these policy dialogs reflect a more modest role for the Commission than it has suggested in the past.

Rep. Jordan grilled Khan on the investigation of Twitter, which he called harassment. The exchange gave her an easy opening and she took advantage of it with a predictable response. First she recounted Commission allegations against Twitter, then she denied any impropriety, and finally she rose to the defense the career staff of the Commission. Attacks on pending investigations seldom gain traction, and this one was no exception.

But Khan could only promise to do better when members turned to her treatment of FTC staff. Rep. Cline bemoaned the resignations of Commissioner Philips and Wilson and reports that dispirited FTC staffers had departed in droves, including 71 senior attorneys leaving in 2021 to 2022. Rep. Fry (R-SC) also raised the annual Federal Employee Viewpoint Survey, which found that the percent of FTC employees who strongly agreed that the senior leaders “maintain high standards of honesty and integrity” had dropped from 57.6% in 2020 to 22.5% in 2022. Until her arrival, FTC scores typically topped the rankings. Members wanted to know what Khan was doing to improve morale. She admitted to management mistakes early in her tenure, and reported corrections such as streamlining decision making and holding more meetings with staff.

Bipartisan Support for Data Privacy

In one of the rare moments of bipartisanship, both Rep. Buck and Rep. Gaetz (R-FL) raised concerns about American’s data privacy and the lack of regulation around data brokers. Khan agreed with the need for national legislation and also noted the FTC’s filing of an amended complaint against data broker Korchava, which allegedly sold Americans’ sensitive personal information. Rep. Bishop (R-NC) asked about the CID recently issued to OpenAI. Khan refrained from addressing it specifically, but she expressed general alarm over AI chatbots accumulating and disseminating a huge trove of data without any quality checks, potentially leading to misinformation, libel, and disclosure of people’s sensitive information. None of the members disagreed.

Rulemakings

Members gave mixed reviews of the rulemaking activity at the FTC, with the consumer protection rules faring better than the first competition rule of Khan’s tenure:

• Non-competes – Rep. Johnson asked whether it was fair to prohibit a small business from protecting its investment in employees by preventing them from jumping to competitors. Rep. Bishop, who once litigated employment contracts, reflected on the variety of state rules that had evolved over the centuries to address non-compete clauses. Khan, he said, would displace them with one national rule. Her concern about concentration in business did not seem to apply to concentration of legal power. Khan assured him that the rulemaking had to observe extensive procedural protections. She expressed eagerness to seeing the feedback from comments to the proposed rule, which you can read more about here.
• Motor Vehicle Rule – Relying on an outside expert’s report, Rep. Hunt (R-TX) expressed concern that the proposed Motor Vehicle Rule would cost $38 billion over 10 years. Khan committed to examining the evidence. You can find the proposed rule here.
• Click-to-Cancel – Khan addressed concerns of members, such as Rep. Cohen (D-TN), whose constituents are bombarded with unwanted subscriptions offers and renewals by explaining the proposed Click-to-Cancel Rule that would require services to make cancelling a subscription as easy as signing up for it. You can read more about the proposed rule here.
• Junk Fees – while touting successes during her tenure, Khan referenced the proposed rule on junk fees and addressed concerns from Rep. Balint (D-VT) about dark patterns, which you can also read more about here.

Consequential Conversations

Chair Khan may have delivered the line that best sums up the oversight hearing when she explained how losing in court could reap benefits in Congress for the FTC. She characterized the history of antitrust as a series of conversations among prosecutors, courts and lawmakers.

Nobody, not even Khan, denied that the conversation between the FTC and the courts has gone poorly for the Commission under her leadership.

As it became painfully obvious over the course of the hearing, the conversation with Congress is not faring much better. Although she received praise, some of it bipartisan, for some of the Commission’s efforts, criticism outweighed compliments, and Khan did not rebut much of it. Indeed, she often declined to engage with member’s questions, choosing instead to resort to anodyne evasions that reinforced their suspicions.

On occasion, friendly members came to her defense. Ethical attacks failed to register, and consumer protection garnered more praise than rebuke. But too often on competition policy, she left her inquisitors frustrated with vagaries that gave her supporters little to work with.

Disputes in courts typically reach clear and quick resolutions in the form of judgments and orders. Indeed, a day after the Commission noticed its appeal in the Microsoft-Activision case, the Ninth Circuit summarily rejected it.

In Congress, consequences percolate more slowly, but they can be much more momentous, as the FTC may soon discover. While Khan jousted with Judiciary members, ominous signals of a crisis for Commission issued from a sedate House Appropriation Committee. In the GOP controlled House, the agency is facing the prospect of a 25 percent budget cut, rather than the one-third increase it requested. Beyond the budget cut, the funding bill would corral the Bureau of Competition and erase Khan’s signature initiative – her redefinition of unfair methods of competition. Among other restrictions, the bill provides:

• Not more than $165,000,000 shall be for the Bureau of Competition;
• None of the funds made available for the Bureau of Consumer Protection shall be reprogrammed to the Bureau of Competition; and
• No funds may be used to implement, administer, or enforce the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition.”

Of course, the budget is far from settled. The Commission has plenty of time and another chamber to avoid the worst. In the Senate, the situation is not dire; appropriators have voted to give the agency enough funds to cover inflation. But as the bidding now stands on Capitol Hill, the FTC stands somewhere between a massive budget cut and the status quo. That is a perilous place to be.

Other members in attendance included Rep. Lofgren (D-CA), Rep. Scanlon (D-PA), Rep. Johnson (D-GA), Rep. Massie (R-KY), Rep. Ivey (D-MD), Rep. Roy (R-TX), Rep. McBath (D-GA), Rep. Tiffany (R-WI), Rep. Bush (R-MO), Rep. Spartz (D-IN), Rep. Gooden (R-TX), Rep. Schiff (D-CA), Rep. Jayapal (D-WA), Rep. Neguse (D-CO), Rep. Dean (D-PA), Rep. Ross (D-NC), and Rep. Moran (R-TX).

* * *

That’s our summary for now. Stay tuned as we continue to track updates from the FTC.

When a Chairman opens an appropriation hearing with these words, an agency seeking funds has a tough task ahead. Undaunted, FTC Chair Lina Khan turned on the charm and often mollified her critics. Appropriators pressed her about the FTC’s proposals to ban non-compete clauses and regulate auto dealers. They complained about reports of scams and fraud on the rise while the FTC pursued subjective notions of competition. In the end, she fared better than all the Commissioners did a week earlier in oversight hearings, but she did not hear an endorsement of her budget request.

Here is our rundown of the biggest issues on this Committee’s radar and the Chair’s responses:

Consumer Protection versus Competition Promotion

The FTC has requested a budget of $590 million for fiscal year 2024, a $160 million increase that would add 300 staffers to the agency. This request comes just as the House passed a bill on Wednesday, April 26, slashing trillions of dollars in government spending.

Leading the questions was Womack, Chairman of the Fiscal Services and General Government Subcommittee of the House Appropriations Committee, and he asked Khan to explain why FTC wanted larger increases for competition than consumer protection. She explained that a competition case can require two or three times as many lawyers and ten times as much money for expert witnesses. Merger activity has been “off the charts,” she said, with a 70% annual increase (although she noted a recent decline from the peak).

The FTC’s merger challenges then drew fire. Members like Joyce (R-OH) and Bishop (D-GA) criticized recent cases involving nascent competitors, and Moolenaar (R-MI) questioned FTC’s coordinating with U.K. authorities to prevent deals among American companies. Khan credited the agency’s international office to a former Republican Chair and dodged questions about individual cases, but the Members returned to concerns about dubious competition policy and declining consumer protection. They implored Khan not to lose sight of scams affecting the elderly and military families. When Ciscomani (R-AZ) relayed the concerns of his constituents about robocalls, Khan touted FTC attacks on the platforms and networks that scammers use. She reported that complaints overall had declined, but he was skeptical, responding that his constituents had not noticed the drop.

Khan reassured the Members that the Commission still addresses fraud and consumer protection along with the increased competition activity. A cut in government spending, she warned, would be devastating to consumers. FTC would have to freeze or even reduce the resources that battle fraud if funding is not maintained.

FTC Morale & Transparency

Womack, Moolenaar, and Cloud (R-TX) raised the annual Federal Employee Viewpoint Survey, which reported that the percent of employees at the FTC who strongly agreed that the senior leaders “maintain high standards of honesty and integrity” dropped from 57.6% in 2020 to 22.5% in 2022. The Members wanted to know what Khan was doing to improve morale. She admitted that mistakes were made early in her tenure and said that she had streamlined decision making and increased transparency by holding meetings with senior staff members.

Moolenaar asked if the FTC will comply with an outstanding subpoena from the House Judiciary Committee. Khan responded that FTC staff is working with the Committee staff and has offered confidential briefings as well as documents.

This was not enough for Amodei (R-NV), who inquired as to what exactly Khan means when she says she is “happy to engage with the staff and see what she can share” as she did to Rep. Duncan during last week’s Energy & Commerce committee meeting. Amodei had spoken with Rep. Duncan, who said that FTC had not yet engaged. Khan conveyed her impression that the FTC’s Office of Congressional Relations had done so. Amodei planned to check.

Motor Vehicle Trade Rule

The FTC’s proposed regulation of motor-vehicle retailing took Congressional heat for the second consecutive week. Hinson (R-IA), Carl (R-AL), and Joyce criticized the proposal for adding confusing paperwork to every transaction and other measures that had not been adequately tested or assessed. They wanted to know why the FTC had declined to extend the comment period on a rule that could add over a billion dollars to automobile prices. Comment periods in other rulemakings had been extended. These Members criticized the lack of clarity in the proposed rule and the lack of consideration for independent car dealerships.

Khan defended the proposal and refusal to grant an extension. FTC economists, she reported, had done a cost-benefit analysis indicating that consumers would save money by avoiding bait-and-switch practices and hidden fees. But doesn’t the FTC Act already reach those practices? Yes, she said, but the rule would “codify illegal practices” providing better notice about what is unlawful. Hinson delivered a stern admonition that it is Congress’s job, not the FTC’s, to decide what should be codified.

The Rule Notice received over 10,000 comments, said Khan, which the FTC is working through. Finally, she defended the comment period by citing the authority of the Dodd-Frank Act, which authorized the FTC to regulate dealers, and to follow APA procedures (rather than Magnuson-Moss). Hinson also asked whether the FTC would reverse course if the enacted rule turned out to be a damaging one, to which Khan explained that if the data showed it wasn’t working then the FTC would revisit it.

Non-Compete Rulemaking

Cloud told Khan that small businesses are concerned about the Proposed Rule eliminating non-competes and that employee contracts should be left to the marketplace to regulate. Amodei objected to a one-size-fits-all approach. Different states had long adopted different approaches. Khan did not yield any ground, noting that small and new businesses also have a hard time obtaining talent. She reported that the FTC had received 26,000 comments on the proposal, which the staff is just starting to assess. She did not say and Members did not ask how much the rulemaking would cost the Commission to complete.

Other Topics

Data Privacy. While data privacy remains a hot topic nationally, it was not as popular for this hearing as it has been in past hearings (as we reported here, here, and here). Nevertheless, both Pocan (D-WI) and Torres (D-CA) questioned Khan about the FTC’s actions regarding companies who sell sensitive data. Khan touted the GoodRx and BetterHelp settlements, as well as the ongoing litigation against Kochava, a data broker that allegedly sold sensitive geolocation data. Khan explained FTC enforcement is particularly focused on business models structured to vacuum up “endless amounts” of data, which came up in discussions of TikTok and some Ed-Tech companies.

Right to Repair. Joyce expressed concern over the increase in price of auto parts. Khan agreed that this is an important issue. She further highlighted that when congress legislates, in this case regarding the Right to Repair, it offers clarity and boosts the FTC’s enforcement authority.

Franchises. Carl asked Khan whether she had evidence of the “unfair and despicable practices” that the Request for Information regarding franchises is based on. She explained that the FTC repeatedly heard in their public meetings about practices involving franchises that were harmful enough to request information to determine if they are anecdotal stories or if it is a problem worth addressing. Carl questioned whether people at meetings could provide anything more than anecdotes in a country with many thousands of franchises.

Independent Consultants. In response to the Inspector General report that raised concerns that the FTC may have overused non-government consultants, Khan explained that the report helped the agency put in place guidance and guard rails that ensures consultants’ are not doing work that should be done by federal employees.

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That’s our summary for now. Stay tuned as we continue to track updates from the FTC.

The new rule is predicted to boost wages and salaries for millions of Americans at every income level, with CEOs getting some of the largest raises. According to the FTC’s analysis, the rule is likely to reduce on-the-job training, shorten job tenure, and generate more resignations. It might also spur litigation if employees spill trade secrets in their new posts.

In measures both simple and sweeping, the rule would ban certain terms of service and regulate others. Categorically banned would be non-compete clauses (or NCCs) in agreements between companies and workers or contractors. Any agreement that prevents a person from quitting a job and working for a competitor or starting a competing business would be illegal, no matter how important it might be to protect trade secrets and competitive strategies of the employer.

Potentially prohibited would be non-disclosure, non-solicitation, and non-recruitment agreements. These would be deemed functional NCCs if they effectively preclude someone from quitting a job and joining a competitor. Agreements requiring workers to pay employers for training would also be deemed functional NCCs if the payments not reasonably related to the cost of the training prevent workers from quitting.

The rule would cover every job and gig in any trade or profession. Guards, cooks, coders, accountants, doctors, and lawyers - whether they make minimum wages or millions of dollars, whether they are employees or contractors, whether they belong to unions or work alone - would be protected. The only proposed exceptions are restrictions in connection with business sales and franchise agreements. State laws and court decisions permitting NCCs would be preempted.

Compliance would be mandatory within 180 days of the final adoption of the rule. By then, employers would have to notify all workers who had NCCs that the clauses no longer applied, that the workers could seek or accept a job with any company in competition with the employer, and that they could open their own businesses in competition with their current employer.

Could a rule this sweeping become final?

Yes, and it could happen soon. The FTC has already addressed the pros and cons of NCCs and found the benefits inadequate to justify the agreements. Acknowledging that the provisions encourage investment in employee training and prevent competitors from acquiring proprietary information, the Commission nonetheless concluded that they do more harm than good. Less restrictive alternatives, like NDAs and trade-secret litigation, could deliver the benefits without the costs, according to the analysis.

Would the rule survive in proposed form?

That depends on the comments the FTC receives and the decisions of the courts if (almost certainly when) the rule is appealed. The rule could stand or fall on the record, and it will depend on the comments the Commission receives.

Can the agency change course?

Interested parties have 60 days to persuade the agency to take a different course. Both the Commission and a dissenting Commissioner have posed fundamental questions and requested additional information. Should the rule impose a presumption of illegality rather than a ban? Should it mandate more prominent disclosures of NCCs rather than banning them outright? Would a requirement that NCCs be reported to the FTC sufficiently discourage their use? Should restrictions apply only to certain occupations or levels of compensation? Should inconsistent state rules be preempted? Do executives, who often retain lawyers to negotiate employment contracts, need protection from the rule? The comment period, which closes March 10, 2023, will likely be the only chance for stakeholders to weigh in.

What is the thinking behind the agency’s proposal?

The proposal draws heavily on research published in academic journals and other published sources. According to studies cited by the FTC, roughly one in five workers, or about 30 million, have contracts with NCCs. Skilled workers are more likely to have these agreements, according to various surveys. About a third of hairdressers, almost half of electrical engineers, and about two thirds of executives, reportedly have signed them. The full extent and effects of NCCs have not been studied in all sectors, acknowledges the agency, but it is prepared to proceed anyway. It regards the right to quit as inalienable for workers and important to competition.

The proposal provoked a vigorous dissent from Commissioner Christine Wilson, who found the academic literature inconclusive and criticized the Commission for rushing to a rulemaking without developing adequate evidence to support it. She recalled testimony at a 2020 FTC workshop that the economic literature is “[s]till far from reaching a scientific standard for concluding [NCCs] are bad for overall welfare.” She also noted a study finding that NCCs in the brokerage sector were associated with lower prices and higher customer satisfaction. As for alternatives like NDAs and trade-secret lawsuits, she found scant evidence that they offered sufficient protection to proprietary information and intellectual property.

The inconsistent evidence prompted Commissioner Wilson to ask stakeholders to submit more research and address whether existing studies support the proposed ban. That request (along with the Commission’s invitations) will likely elicit important additions to the record, for example an article published by one of FTC’s own economists who concluded that the literature had not yet established NCCs’ effects on mobility, wages, entrepreneurship, and innovation.

What will happen if a final rule emerges?

If a final rule emerges from this proposal, questions about its scope and the evidence supporting it may elevate a more fundamental issue: whether the FTC has authority to promulgate rules prohibiting unfair methods of competition (UMC), and whether the agency has properly distinguished illegitimate from legitimate activity.

Commissioner Wilson argued at length in her dissent that Congress never granted the Commission competition rulemaking authority. This author has argued the same, here and here. In addition to testing the FTC’s general authority, the NCC ban will face other challenges, for example whether the agency can preempt state laws and regulate labor relations, both of which are generally beyond the reach of the antitrust laws.

Will the FTC stop here?

The NCC ban is the first of a host of competition rules the FTC has planned. Others include surveillance, the right to repair, pay-for-delay pharmaceutical agreements, unfair competition in online marketplaces, occupational licensing, real-estate listing and brokerage, and unspecified industry-specific practices that substantially inhibit competition. The list appears in a December 2021 filing with OMB (citing the President’s Executive Order on Competition).

The breadth of these rules may not rival the NCC proposal, but their consequences will be difficult to predict in light of the Policy Statement on Unfair Methods of Competition that the FTC issued in November 2022 (which also prompted a dissent from Commissioner Wilson). According to its new policy, the FTC need not apply the cost-benefit analysis that the antitrust laws require before condemning a method of competition. Illegal under Section 5 can be any practice that is:

• coercive, exploitative, collusive, abusive, deceptive, predatory, or involves similar abuse of economic power; or is otherwise restrictive or exclusionary, depending on the circumstances;
• and tends to negatively affect competitive conditions/generate negative consequences (e.g., raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, reducing likelihood of potential or nascent competition).

If an abusive, coercive, and deceptive nature of practice is obvious, the FTC will not dwell on its tendency to affect competitive conditions. The agency will use a sliding scale to decide how much weight to accord to the consequences. Abuse, coercion, and deception are concepts that typically arise under the consumer protection laws. Which authority the Commission will assert and when remains to be seen. Indeed, while the Commission included surveillance as a potential competition rule, in August it released a proposal for a rulemaking on Commercial Surveillance and Data Security using its authority under Section 18 of the FTC Act to issue consumer protection rules. Kelley Drye’s synopsis of that ANPR can be found here.

The NCC proposal puts the Commission’s jurisdiction, policy, and analysis all at stake. A successful assertion of this authority would herald the ascension of an agency with greater power and broader reach than any regulator in the federal government. Companies should heed the Commission’s and Commissioner Wilson’s calls for help in this proceeding.

More to come from Kelley Drye

If a final rule emerges from this proposal, virtually every employer in the United States will be impacted. As such, Kelley Drye attorneys from our Antitrust and Competition, Advertising Law, and Labor and Employment practice groups are working together to provide practical guidance and information to our clients. This post is the first of several on this topic. Our next post offers a practical guide for employers to prepare.

Although Shkreli’s prison sentence began in 2017, the court said he continued to exert his influence over the company, which in December agreed to pay $40 million for its part. The former CEO is now banned from the pharmaceutical industry for life. While a lifetime ban may seem like an extreme remedy, be mindful that State AGs don’t reserve this punishment for those in prison, and have imposed industry bans in other actions and industries. Shkreli has also been ordered to pay disgorgement to the states in $64.6 million. As part of his criminal judgment, he had already lost several assets including his prized Wu-Tang Clan album, a source inspiration for General James’ words of condemnation in her victory press release. Another executive Kevin Mulleady also settled, paying $10 million.

State AGs have been extremely active in the pharmaceutical antitrust space in recent years, including when it comes to generic drug pricing. Specifically, State AGs have alleged that generic drug manufacturers of topical products conspired to inflate prices and reduce competition. Most of the State AGs have been investigating the practice since 2016, with defendants now numbering in the dozens in their 3^rd Amended Complaint. The states are caught up in an MDL, but their bellwether trial on dermatology treatments will be the first up.

Shkreli’s lifetime ban may not even be the biggest antitrust news out of federal court for the State AGs the past week, as 48 states appealed the dismissal in their Facebook case the same day. Like the FTC, state AGs have challenged Facebook’s acquisition of companies such as WhatsApp and Instagram as anticompetitive and creating a monopoly. Unlike the FTC however, the state AG claims were dismissed with prejudice as time-barred, which led to last week’s appeal. And in other major state antitrust news, the Texas-led multistate coalition suing Google for ad tech manipulation and deception had its complaint largely unredacted, making public new details of the States’ allegations. Expect States to continue to use their antitrust tools in the pharma and big tech space as these remain top priorities for 2022, and join the Kelley Drye State Attorneys General team on January 27 at 1:00 ET to learn more about what to expect from State AGs in the coming year.

State Attorney General Consumer Protection Priorities for 2022 Thursday January 27 at 1:00pm ET

Consumer protection enforcement efforts are expected to increase dramatically this year. Recent pronouncements from State Attorneys General around the country bring privacy, big tech and the misuse of algorithms, and basic advertising related frauds into particular scrutiny.

Please join Kelley Drye State Attorneys General practice Co-Chair Paul Singer, Advertising and Marketing Partner Gonzalo Mon, Privacy Partner Laura VanDruff, and Senior Associate Beth Chun for discussion and practical information on these and other state consumer protection, advertising, and privacy enforcement trends.

Register Here

With an unprecedented attack on policies the Federal Trade Commission had long embraced, the new majority of Democratic Commissioners revealed a bold enforcement agenda that would circumvent Supreme Court decisions and avoid Congressional limits.

It was a meeting like none the Federal Trade Commission has ever held. On one week’s notice, the Commission adopted new rules to impose civil penalties on substandard Made-in-USA claims, removed judges and safeguards from rulemaking proceedings, rescinded its 2015 enforcement policy statement on unfair methods of competition, and granted staff more authority to issue subpoenas and civil investigative demands. The vote on every issue followed party lines. Republican Commissioners, Noah Phillips and Christine Wilson, voted against all, and the Democratic Commissioners, Chopra, Khan, and Slaughter, rejected all amendments. Chair Khan announced that public meetings will become regular events at the FTC.

Made in USA Claims

Commissioner Chopra took the lead on the Made-in-USA (MUSA) rule, which would impose civil penalties on claims that do not meet FTC standards for domestic content, whether those claims appear on labels or in marketing. He criticized the Commission for years of allegedly allowing deceptive claims to persist and wrongdoers to escape fines. Imposing fines, he said, was one way of recovering the power the Commission was denied in the Supreme Court’s decision in AMG Capital Management v. FTC, which held that Section 13(b) of FTC Act did not authorize the Commission to obtain monetary relief.

Phillips opposed the rule, saying that Congress had not given FTC the authority to cover off-label claims; it had authorized MUSA rules only for product labels. Unless and until Congress granted authority for expedited rulemaking on advertising claims, which Congress is now considering, he insisted that the FTC was bound to use the more restrictive Magnusson-Moss procedures. Wilson objected to the short notice announcing the meeting, objected to the exclusion of staff from the meeting, and warned that it was unwise to disregard a unanimous Supreme Court that had just admonished the Commission for exceeding its authority to obtain money in consumer protection cases.

Expediting Rulemaking

Foreshadowing an ambitious regulatory agenda was a motion to streamline new rules under Section 18 of the FTC Act. The motion would remove the chief administrative law judge from the role of presiding officer in rulemakings. The FTC Chair would preside. The motion also proposed eliminating the requirement of a staff report to accompany a rule recommendation. Slaughter said these were unnecessary “self-imposed” limits. Chopra praised the proposal for helping end the era of “perceived powerlessness” at the FTC

Phillips and Wilson objected, citing concerns that removing the judge would threaten the independence of the rulemaking process – an extensive fact-finding exercise – and lend support to challengers who claim that FTC rules are politically motivated. As for staff reports, Phillips remarked that these gave the Commissioners and the public some confidence that a rule would not inflict unnecessary harm on the economy. Wilson reminded her colleagues that zealous rulemaking in the 1970s precipitated an existential crisis for the agency. It closed its doors after public resistance and widespread ridicule prompted Congress to defund the FTC. Not until the Commission promised a return to responsible enforcement was it allowed to reopen. The FTC delivered on that promise with a series of policy statements clarifying unfair acts and practices, illegal deception, and necessary substantiation for advertising claims.

Wilson proposed posting the procedural changes for comment. It failed 3-2. Phillips proposed retaining the chief judge and the staff report. It also failed to attract a Democratic vote. Rulemakings without a judge and without a staff report passed without a Republican vote.

Rescinding the Competition Policy Statement

In a sweeping departure from a bipartisan antitrust policy, the Commission rescinded its 2015 Policy Statement on Unfair Competition. Khan argued that the FTC should not have to show a likelihood of harm to competition in order to declare conduct unfair. In her view, the FTC Act was intended to circumvent the Supreme Court’s adoption of the Rule of Reason in antitrust cases – a requirement that condemned restraints of trade only when their anticompetitive effects outweighed the procompetitive benefits. The Rule of Reason made it too hard to prove violations, said Khan, and the FTC’s policy statement improperly confined the agency to an enforcement policy indistinguishable from the standards that DOJ applied.

Wilson regarded the rescission as an abandonment of the consumer welfare standard, the framework of antitrust analysis for half a century. She expressed fears that if competition policy were not designed to benefit consumers, it could be coopted by special interests. She added that when the FTC had failed to apply a standard consistent with the antitrust laws in the past, its decisions had often been reversed on appeal. (The FTC lost a string of appeals in the 1980s when it attempted to prohibit refusals to deal, price discrimination that might be competitive, supplier-distributor pricing policies, and practices that could facilitate collusion.) Phillips noted that the Supreme Court’s decision in NCAA had just applied the Rule of Reason in holding for plaintiffs, so it was hardly a bar to successful prosecution. Of concern to the Republicans was a proposal in Congress that would eliminate the FTC’s competition authority altogether.

Proposals to seek comment on the rescission were voted down on party lines. Competition policy at the FTC will depend on future Commission actions.

Targeting Sectors and Suspects

Finally the FTC identified seven areas in which it would adopt omnibus resolutions authorizing compulsory process – civil investigative demands and subpoenas enforceable in court. The Commission typically authorizes compulsory process when it identifies specific companies or conduct – like a merger or a deceptive practice – warranting intensive and urgent investigation. These resolutions covered broad sectors of the economy and authorized investigations under practices any law the FTC enforces. As explained in its press release, the Commission’s crosshairs are focused on these sectors and individuals:

Priority targets include repeat offenders; technology companies and digital platforms; and healthcare businesses such as pharmaceutical companies, pharmacy benefits managers, and hospitals. The agency is also prioritizing investigations into harms against workers and small businesses, along with harms related to the COVID-19 pandemic. Finally, at a time when merger filings are surging, the agency is ramping up enforcement against illegal mergers, both proposed and consummated.

With these resolutions, the FTC delegated the decision to issue compulsory process to the staff and a single commissioner. In the past, an investigation into a new area could not use compulsory process until the commission voted on the resolution. These omnibus resolutions dispensed with that procedure. Khan hailed the move as cutting “red tape bureaucracy.” Wilson countered that the Commissioners were abrogating their sworn responsibilities of supervision. This last comment reveals the import of the change. If Chopra departs to the Consumer Financial Protection Bureau, which he has been nominated to direct, the Democrats will lose their majority. These resolutions will allow staff to open investigations, demand documents, and conduct depositions without the approval of the Commission. All the staff will need is the approval of a commissioner.

The Future of FTC Enforcement

In short, July 1, 2021 was an extraordinary day in the history of the FTC. It is an unmistakable harbinger of a Commission that is aiming to ramp up enforcement beyond the levels it sought to achieve in the 1970s. None of the supporters of the agenda had answers to the dissenters’ repeated questions: How will the agency overcome the obstacles that stymied its unbridled ambitions in the past? How will it respond to the resistance it will face from Congress, the courts, and the public it is supposed to serve? The public at this meeting, Phillips noted, was scheduled to comment after the Commission had made its decisions, so that their testimony would not be taken into account before the votes.

How far the Commission can take this agenda will be difficult to predict until the inevitable allegations of unauthorized investigations, arbitrary and capricious rules, unpredictable decisions, and deprivations of due process make their way to higher authorities. Safer predictions: We will see the fruits of yesterday’s decisions in the form of CIDs, subpoenas, proposed rules, and new interpretations of a century-old competition statute. Businesses and citizens will face the first engagement. Then Congress and the courts will join the fray. For a preview of potential outcomes, there is no better place to start than the rich literature of FTC history.

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Subscribe here to Kelley Drye’s Ad Law Access blog and here for our Ad Law News and Views newsletter. Visit the Advertising and Privacy Law Resource Center for update information on key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling.

Kelley Drye attorneys and industry experts provide timely insights on legal and regulatory issues that impact your business. Our thought leaders keep you updated through advisories and articles, blogs, newsletters, podcasts and resource centers. Sign up here to receive our email communications tailored to your interests.

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1-800-Contacts is one of the largest sellers of contacts online. One of the principal ways consumers shop for contacts is through key word searches. In the past, certain 1-800-Contacts competitors purchased the keyword “1-800-Contacts.” That would place their advertisements at the top of the list of results. 1-800-Contacts sued these companies for trademark violation and settled with a good number of them. According to the Second Circuit, the settlements “include[] language that prohibits the parties from using each other’s trademarks, URLs, and variations of trademarks as search advertising keywords. The agreements also require the parties to employ negative keywords so that a search including one party’s trademarks will not trigger a display of the other party’s ads. The agreements do not prohibit parties from bidding on generic keywords such as ‘contacts’ or ‘contact lenses.’”

The Federal Trade Commission found these agreements inherently suspect and sued 1-800-Contacts for violating Section 5 of the FTC Act. An administrative law judge agreed, 1-800-Contacts appealed and the Commission denied the appeal. 1-800-Contacts then appealed to the Second Circuit. The Second Circuit disagreed that the behavior was “inherently suspect” and that the agreements on bidding were not bid rigging. And, after itself engaging in a rule of reason analysis, found no anticompetitive effect, that the Commission did not in fact rebut 1-800-Contact’s evidence of trademark protection, and that the Commission had not shown that a viable, less restrictive alternative existed.

The Second Circuit vacated the Commission’s decision and ordered the Commission to dismiss the administrative complaint.

Analysis

By buying 1-800-Contacts’ trademarks as keywords, its competitors are engaged in classical free riding. The only reason a consumer would type in “1-800-Contacts” in a search is because 1-800-Contacts has invested a great deal of time and money to develop its brand and build goodwill. When a consumer sees a competitor’s name and goes to that website, the competitor benefits from 1-800-Contacts investment without incurring any of the costs. This practice is the “real world” equivalent of putting up a sign in front of their store that says they are “Marshall Field’s” when in fact they are nothing of the sort. Customers go into the store thinking it’s Marshall Field’s. It’s no defense that those customers can leave and go to a different store. The settlements are also narrowly tailored to limit this free riding. It doesn’t, for example forbid them from buying “contacts” or their own trademarks and thus making their own investment in their brand.

Further, there is also no evidence that suggests being the first advertisement in a list of search results where the word searched is the name of the business confers market power. Indeed, one would think that if there was a competitive advantage to being first in a list of results where the word searched is the name of the business, it’s because of the good will the business has created in its name. To call this arrangement “inherently suspect” is really just the Commission taking it upon themselves to declare these agreements per se illegal.

And it’s not bid rigging. As the Second Circuit observes, 1-800-Contacts’ competitors can buy their own trademarks as well as the generic terms. And the agreements allow the trademark holders to narrowly protect their protectable interest in forbidding free riding off their investment in their marks and goodwill. The Commission effectively backs into this conclusion by virtue of their initial assessment that the agreements are inherently suspect. They declare the practice without value, then conclude the practice is without value.

One could argue that the Court overreached by ordering the complaint dismissed. If the Commission failed to introduce evidence, because, for example, it used the wrong standard, it should have the opportunity to develop and introduce that evidence. By forbidding the Commission from doing so, the Second Circuit has assumed the role of fact finder.

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Subscribe here to Kelley Drye’s Ad Law Access blog and here for our Ad Law News and Views newsletter. Visit the Advertising and Privacy Law Resource Center for update information on key legal topics relevant to advertising and marketing, privacy, data security, and consumer product safety and labeling.

Kelley Drye attorneys and industry experts provide timely insights on legal and regulatory issues that impact your business. Our thought leaders keep you updated through advisories and articles, blogs, newsletters, podcasts and resource centers. Sign up here to receive our email communications tailored to your interests.

Follow us on LinkedIn and Twitter for the latest updates.

Virtually unanimous was the sentiment to increase funding for the Federal Trade Commission and the Antitrust Division at the Department of Justice. So was the desire to accelerate antitrust litigation and the idea of easing the burden on the government to stop mergers. Consensus seemed close as well on making data more portable for consumers who switch vendors and products and on improving the interoperability of apps and devices. Proposals to create a new federal agency to regulate Big Data met with less favor, and arguments to break up large firms did not capture the day. The Commission emerged as the agency most likely to see an expansion of authority.

The hearing was the first of a series planned to develop legislation based on the extensive investigation of competition in Big Tech that the subcommittee had conducted in the last Congress. Chairman Cicilline opened with a warning that dominant companies have too much power and it needs to be curbed. “Mark my words, change is coming. Laws are coming.” He cited dominant firms’ acquisitions of nascent competitors, contractual conditions that platforms impose on other vendors, disadvantaged news media, and measures that other countries have taken to rein in the companies. Perhaps most importantly, he concluded by noting the agreement of Ranking Member Buck on many of the proposals.

For his part, Mr. Buck recounted examples of conduct attributed to Big Tech during the investigation last year, including allegations of collusion, unfair competition against vendors on platforms, markups added to competitors’ products and actions to silence political speech. He then expanded on the remedies he proposed. First, he advocated data portability and recalled that one of the most popular laws Congress ever passed was the Telecommunications Act of 1996, which allowed consumers to keep their phone numbers when they switched carriers. Second, he extolled interoperability – allowing “competing technologies to speak to one another” – so consumers are not locked into one choice. Third, he supported more robust enforcement of the antitrust laws, although he cautioned against a Glass-Steagall Act for the internet (referring to proposals to prevent platforms from competing with vendors on them).

Witnesses representing a cross section of the political spectrum offered testimony ranging from a defense of modern antitrust doctrine to a proposal that Congress create a regulator like the bodies that once controlled railroad and telecom. The majority of the Committee was clearly between maintaining the status quo and replacing antitrust enforcement. Ranking Member Buck said, “the key is to make sure that we do not take a chainsaw to the whole economy, but rather we should implement a scalpel-like approach for Big Tech.” The odds of some sort of surgery loom large.

Background

Both the Chairman and the Ranking member issued reports in late 2020. The Majority Staff Report, Investigation of Competition in Digital Markets,[2] summarized more than a year of investigation that spanned seven hearings and amassed 1.3 million documents, “the most significant congressional antitrust investigation in more than a generation,” said Chairman Nadler at yesterday’s hearing. In over 400 pages the Report reviewed market structure, entry conditions, innovation, privacy, press, and economic liberty in light of modern technology and the large firms that have become identified as its leaders. Although focused on Big Tech, the recommendations could affect competition and consumer protection throughout the economy. The Staff Report advocated measures such as these:

a. Restoring Competition in the Digital Economy

• Structural separations and prohibitions of certain dominant platforms from operating in adjacent lines of business;
• Nondiscrimination requirements, prohibiting dominant platforms from engaging in self-preferencing, and requiring them to offer equal terms for equal products and services;
• Interoperability and data portability, requiring dominant platforms to make their services compatible with various networks and to make content and information easily portable between them;
• Presumptive prohibition against future mergers and acquisitions by the dominant platforms;
• Prohibitions on abuses of superior bargaining power [and] due process protections for individuals and businesses dependent on the dominant platforms.

• Strengthening Section 7 of the Clayton Act, including through restoring presumptions and bright-line rules, restoring the incipiency standard and protecting nascent competitors, and strengthening the law on vertical mergers;
• Strengthening Section 2 of the Sherman Act, including by introducing a prohibition on abuse of dominance and clarifying prohibitions on monopoly leveraging, predatory pricing, denial of essential facilities, refusals to deal, tying, and anticompetitive self-preferencing and product design; and
• Taking additional measures to strengthen overall enforcement, including through overriding problematic precedents in the case law.

• Restoring the federal antitrust agencies to full strength, by triggering civil penalties and other relief for “unfair methods of competition” rules, requiring the Federal Trade Commission to engage in regular data collection on concentration…; and
• Strengthening private enforcement through elimination of obstacles such as forced arbitration clauses, limits on class action formation, judicially created standards constraining what constitutes an antitrust injury, and unduly high pleading standards.

• More Resources for Antitrust Agencies - The report makes a good case for the need to strengthen our nation’s antitrust agencies with regard to resources.
• Data Portability - Conservatives should consider supporting very limited legislative changes to provide consumers with a data portability standard that is similar to transferring cell phone numbers, as mentioned above. However, the language must be exact to prevent regulators from stretching Congressional intent to regulate Internet data companies as public utilities under Title II of the Communications Act of 1934, similar to net neutrality.
• Reforming the Burden of Proof in Merger Cases – The evidentiary burden of proof that antitrust agencies must meet in many merger cases has become insurmountable. As a result, our nation’s antitrust enforcement agencies have built a wall, making it nearly impossible to bring an enforcement case on potential competition grounds in digital markets, granting near-total immunity for Big Tech. …. Congress should reaffirm to the antitrust enforcement agencies that the standard given to the agencies by Congress under the Clayton Act Section 7 allows them to challenge a merger when “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” The standard does not specify price change as our enforcers’ only way to review cases where harms to innovation and potential competition exist, and neither does it raise the evidentiary bar on potential completion versus actual competition. In other words, the antitrust agencies raised the bar on themselves, with help from the courts, in the years since Congress adopted the Clayton Act.

However, instead of issuing new bright line rules and creating a large regulatory framework to govern these behaviors, we believe the solution is to offer a thoughtful plan that ensures our nation’s antitrust enforcers are following Congress’ original intent regarding the burden of proof needed to bring and win cases involving these theories of harm.

The agreements and disagreements in last year’s reports were on display in yesterday’s hearing. The agreements could well signal the most significant changes to antitrust laws in decades. Whether the majority and minority can come together on the open issues remains less likely.

[1] Hearing video available at https://judiciary.house.gov/calendar/eventsingle.aspx?EventID=4382.

[2] Available at https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf?utm_campaign=4493-519.

[3] Joined by Doug Collins, Matt Goetz and Andy Biggs, Available at https://buck.house.gov/sites/buck.house.gov/files/wysiwyg_uploaded/Buck%20Report.pdf.

Subscribe to Ad Law News and Views to stay current on the latest ad law and privacy matters. Find previous issues here.

A roundtable featuring Alexandra Reeve Givens (President and CEO, CDT), Jessica Rich (former Director of the FTC’s Bureau of Consumer Protection), Will DeVries (Google), and William McGeveran (University of Minnesota Law School) surveys the enforcement and policy landscape. The issue also features articles that examine the California Privacy Rights Act, the state (and stakes) of Section 230 reform, privacy issues in contact tracing apps, and applications of economic analysis to privacy. On the international front, authors analyze the first two years of GDPR enforcement and well as privacy and antitrust developments in China.

For additional privacy information and resources, visit Kelley Drye’s Advertising and Privacy Law Resource center.

The FTC has recently sent warning letters to hundreds of companies for allegedly falsely implying that products can be used to treat, cure, mitigate, or prevent COVID-19. The FTC has also issued warning letters for implied earnings claims connected to the pandemic, alleging that some have overpromised on the financial opportunities available and misleadingly tied them to the pandemic. These announcements have made clear that any claim mentioning COVID-19, the pandemic, or even “these times” will be closely scrutinized.

Please join us for a webinar covering the basics of advertising product and earnings claims, and how those should be applied during the pandemic. Discussion topics include:

• Claim Substantiation and Puffery
• Express and Implied Product Claims
• Express and Implied Earnings Claims
• Enforcement Examples and Takeaways
• Monitoring Third Parties Making Claims on Your Behalf (Endorsers, Independent Distributors)
• What to do if you receive a warning letter or other enforcement action

Trade Association Antitrust 101 Please join us on July 14 for a webinar geared toward association legal counsel, executives, marketers, staff and members, participants in association activities or attendees to association meetings.

Antitrust issues are a constant concern for trade associations and their members. Competition regulators will have associations and their members under even greater scrutiny as groups work together to address the ongoing challenges presented by COVID-19. Please join us for a webinar covering the basics of antitrust compliance for association legal and compliance counsel, executives, staff and outside advisers. This webinar is designed to help association professionals and those who attend association functions identify potential antitrust issues and provide practical guidance for effective compliance programs and mitigating risk. Finally, we will talk about how to respond to enforcement actions in the event your organization is involved in an investigation.

Discussion topics include:

• Antitrust law basics
• Best practices for associations and its membership
• Effective compliance and training programs
• Strategies for responding to warning letters or other enforcement actions

Additional webinars will be announced soon.

Watch the replay here.

As we previously reported here, Commissioner Wilson overlapped with Chair Simons during his time as Director of the Bureau of Competition, while she served as Chief of Staff to then-Chair Timothy Muris. The FTC currently is in the middle of public hearings on consumer protection, privacy, and competition policy and enforcement, and we expect these hearings and the public comments received to help shape the Commission’s priorities going forward.

The core question discussed at the hearing was whether current antitrust law is sufficient to ensure net neutrality absent FCC rules. The panelists—including FTC Acting Chairman Maureen Ohlhausen and Commissioner Terrell McSweeney; former FCC Commissioner Robert McDowell; and Michael Romano, NTCA Senior Vice President of Industry Affairs and Business Development—and committee members were generally divided down party lines, with Republicans arguing that FCC rules were both unnecessary and counterproductive and Democrats arguing that rules were necessary to ensure an open Internet, free expression, and innovation.

At the same time, all panelists agreed that Congress should eliminate the so-called “common-carrier exemption,” which exempts Title II common carriers from FTC jurisdiction. By eliminating the exemption, the panelists argued that the FTC could assume a greater role in enforcing net neutrality and other consumer protection violations related to the communications industry.

The hearing took place in the midst of ongoing regulatory and judicial proceedings that would define the contours of FTC and FCC jurisdiction with respect to broadband providers. Specifically, the FCC is considering a Notice of Proposed Rulemaking that would dramatically scale back the FCC’s earlier 2015 open Internet order–reclassifying broadband internet access as a lightly regulated “information service” and returning primary jurisdiction over broadband services to the FTC. At the same time, the Ninth Circuit has before it a pending rehearing en banc of a 2016 decision that broadly interpreted “common carrier exemption” as applying to all activities of common carrier entities, not just common-carrier activities. As we discussed in an earlier blog post, the original ruling was controversial, and FCC Chairman Ajit Pai has praised the decision to rehear the case.

For more information on the state of play with the current boundaries between FCC and FTC jurisdiction (in the context of consumer privacy), please join us for an ABA Antitrust Section webinar sponsored by the Privacy and Information Security and Media and Technology Committees on November 13, 2017 featuring:

• John Heitmann, Chair, Communications Practice, Kelly Drye & Warren (moderator)
• Jennifer Tatel, Partner, Wilkinson Barker Knauer
• Neil Chilson, Chief Technologist, Federal Trade Commission
• Rick Chessen, Senior Vice President, Law and Regulatory Policy, NCTA – The Internet & Television Association
• Yosef Getachew, Policy Fellow, Public Knowledge

Assuming Simons is confirmed and appointed as Chair, Acting Chairman Maureen Ohlhausen would return to her position as Commissioner. Her term is set to expire in September 2018. Commissioner Terrell McSweeny also continues to serve on the Commission, although her term expired in September, and as reported by MLex.com, Simons’ confirmation would place him in the slot she currently occupies. More information on each of the three nominations follows.

Joseph Simons. Currently a partner and co-chair of the Antitrust Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, Simons has worked in private practice for the majority of his career and is likely to be welcomed by industry as a reasoned and qualified choice. He also has experience in public service, having served at the FTC as Director of the Bureau of Competition from June 2001 to August 2003. He also served as the Associate Director for Mergers and the Assistant Director for Evaluation at the FTC in the late 1980s. Simons has worked on a number of high profile antitrust cases, including representing MasterCard Inc. in antitrust class actions over merchant fees, and representing a consortium including Microsoft, Ericsson, RIM and Sony in its $4.5 billion acquisition of the patent portfolio of Nortel Networks.

As a long-time antitrust practitioner with experience in private and public practice, Simons is likely to bring a thorough and deliberative approach to the Commission. While Simons is unlikely to support enforcement that is not justified by a rigorous economic analysis of costs and benefits, he’s also unlikely to shy away from challenging deals and conduct that fail the economic test. In short, economic effects and rule of reason will guide policy. Simons notably has significant high tech and intellectual property experience, as well as merger experience, where economics predominates decision making.

On the consumer protection side, Simons’ experience will likely reinforce the policies announced by Acting Chairman Ohlhausen to put economic injury at the center of case selection. The emphasis on fraud will likely continue, while actions and remedies that would regulate ordinary business practices will face the test of economic analysis. If he’s confirmed as expected, Simons would serve a seven-year term that began on September 26, 2017.

Rohit Chopra. While Simons’ experience comes primarily from the competition side, Chopra has concentrated on consumer protection issues. Chopra is currently a senior fellow at the Consumer Federation of America where he focuses on consumer finance issues, particularly with regard to their impact on younger Americans. Chopra was previously the Assistant Director of the CFPB where he led enforcement actions against student loan borrowers and helped establish a new student loan complaint system at the agency. Chopra’s background and experience with consumer finance give him an expertise rare among commissioners and could translate into significant influence on hot topics such as credit reporting, debt collection, and big data. He also may engage in advertising and privacy initiatives affecting children and younger Americans, given his prior interest in this area.

Chopra’s approach to competition could be influenced by longtime ally, Senator Elizabeth Warren (D.-Mass.), who has distinguished herself as a proponent of aggressive enforcement and new legislation. Unlike most prior FTC commissioners, Chopra is not an attorney. His background is in business and includes an MBA from the Wharton School at the University of Pennsylvania. Trump indicated that Chopra would be appointed to the remainder of a seven-year term that would expire on September 25, 2019.

Noah Phillips. While yet to be announced by the Trump Administration, media outlets are reporting that Phillips will be named to fill another vacancy at the Commission. Phillips is presently Chief Counsel to Senator Cornyn. Phillips previously worked as an associate at Cravath, Swaine & Moore LLP and Steptoe & Johnson LLP, before leaving the private sector to serve as counsel to Cornyn.

Phillips would come to the Commission with significant law firm experience, as well as an understanding of the Hill. Among others, Cornyn serves on the Senate Committee on Finance, which includes subcommittees on international trade and energy. We would expect, therefore, to see Phillips take an active interest in international issues, as well as competition in the energy sector.

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We will continue to monitor the appointment and confirmation process and post updates here.

During her remarks, acting chair Ohlhausen offered insight into consumer protection priorities during her tenure as acting chair.

First, acting chair Ohlhausen signaled the importance of the Agency focusing on stopping fraudulent schemes, especially those targeting vulnerable populations such as the elderly or military members.

Second, the acting chair noted that remedies sought in FTC cases should be more closely linked to actual, rather than speculative, consumer injury or harm, echoing her recent dissent in Qualcomm, and further posited that the FTC’s efforts in recent cases to collect disgorgement in non-fraud cases is inconsistent with prior FTC practice. Specifically, the acting chair called into question the Agency’s practice of seeking disgorgement that is disproportionate to actual consumer injury. As an example, she referred to her dissent in Uber, where she wrote that “I dissent from the complaint against Uber and the settlement resolving that complaint because the monetary settlement of $20 million is not tied to an estimate of consumer harm.” And for privacy enforcement actions, she emphasized the need for “concrete injury” to justify agency action.

Third, acting chair Ohlhausen indicated a desire for the FTC to be more transparent about its investigation and enforcement matters. She noted that there may be value in disclosing (without disclosing confidential information) details of investigations where the FTC closes an investigation without nay enforcement action. According to acting chair Ohlhausen, such transparency would help provide guidance to businesses about practices and policies that the Commission deems permissible, in addition to those that are not. It is unclear how much additional information acting chair Ohlhausen envisions disclosing beyond information contained in Commission closing letters at present.

Also with respect to investigations, the acting chair signaled the need for the Agency to narrowly tailor investigative requests to only obtain information that is necessary and relevant to its investigations. Recognizing the burden of overly broad information requests, she stated that “the FTC must remain able to collect the information we need to enforce the law, but I am certain that we can do this while reducing the burden on businesses, particularly third parties who are not under investigation.”

Although her remarks were brief, the acting chair’s address suggests a more restrained approach by the FTC than it has pursued in recent years. Given the three open seats on the Commission yet to be filled, two by Republicans, and the future appointment of a permanent chairperson, more changes are a certainty.

This webinar series will commence January 25 and continue the last Wednesday of each month, as outlined below.

January 25, 2017, February 22, 2017, March 29, 2017, April 26, 2017, June 28, 2017, July 26, 2017, September 27, 2017, October 25, 2017, and November 29, 2017

Kicking off the series will be a one-hour webinar on “Marketing in a Multi-Device World: Update on Cross Device Tracking” on January 25, 2017 at 12 PM ET.

CLE credit will be offered for this program.

The Antitrust Forecast - William C. MacLeod

It’s not that hard to predict. If you want to factor the antitrust forecast into your business plans, you have two weather patterns looming. We can assess the first one quite accurately already. And notwithstanding all the speculation, we can get a pretty good feel for the second front as well.

Forget about the first 100 days. The first phase of the new antitrust era will last a good six months, and could stretch out longer. The immediate outlook? More of the same. If you are responding to an investigation, if you have a deal pending, the wind is hardly going to shift. Your encounter next week or next month will remind you of your last meeting. If you have negotiated a deal with the staff, don’t expect them to change their mind. And don’t expect them to postpone the proceeding. Virtually all the officials who are looking at your matter today will be handling it this winter, and probably next spring. That goes from bottom to top.

I’ve worked through the last five transitions at FTC and DOJ (inside the agencies during one), and I don’t recall a single administration that had its full antitrust team in place before the cherry blossoms staged their show. We may know who the new agency heads will be by next spring, but how they operate will remain to be seen. New FTC Commissioners and Assistant Attorneys General must be nominated by the President and confirmed by the Senate. (Of course, a sitting FTC Commissioner could be given the chair and an acting head could be named at DOJ’s Antitrust Division). These decisions typically do not come in the first wave of appointments.

Once the new heads are announced, confirmed and sworn in, the first thing they will do is assemble their teams. It takes time to recruit bureau directors, deputy assistant attorneys general and front office personnel. It takes more time to coordinate and deploy them. Meanwhile, the career civil servants, who occupy all but a few positions at the agencies, will continue to do the daily work of law enforcement.

Sometime next summer the second phase will probably begin, but we won’t notice it right away. We will hear about it in speeches, and some of us may experience it first-hand with investigative requests, but it will take another year or two before most businesses feel its effects. The reason is simple. Every new administration inherits the pipeline of the last one, and right now at the antitrust agencies that pipeline is full. It takes months for an agency to devise new strategies and much longer to convert them into enforcement initiatives. We should not expect to see the results of new approaches until year two or three of the administration.

What might we see in the way of a course correction? Don’t expect a pirouette. The history of transitions in the last three decades suggests that antitrust enforcement in the future will look remarkably like it does today. The debate over enforcement today (and there was a debate in the campaign) does not portend the end of that history. Ironically, most of the criticism of current enforcement has come from advocates of more, not less, regulation than the current administration imposed. By and large, there is consensus about the policies at FTC and DOJ.

One more factor suggests that the antitrust we know today is a good barometer of the antitrust we’ll face tomorrow. Antitrust is, after all, law enforcement. The agencies don’t get to make the law they enforce. It comes from century-old statutes that Congress is not likely to change. The interpretation of those statutes is in the hands of federal judges, whose decisions have placed limits on the agencies’ options. We know they are not going anywhere soon.

It is always fun to speculate about the storms that might sweep through antitrust. But we have no basis to predict abnormal weather patterns in the seasons ahead. We know where the trouble is likely to arise, and we should be able to avoid it. It makes perfect sense to plan now for an uneventful voyage.