FTC Quietly Puts September 3 Deadline For Comments On Proposed Ban Of “Exclusionary” Contracts
Earlier this month, the FTC quietly—without a press release that is customary for requests for comment—put a sudden September 3 deadline for comments on a years-old Open Markets Institute petition for rulemaking to outlaw exclusionary contracts. This effort represents yet another attempt by the agency to expand its own power and interfere with freedom of contract. Here’s what you should know:
— Exclusionary contracts are “generally lawful” and are enforced by the courts under the current antitrust framework
— Exclusionary contracts have to be analyzed on a case-by-case basis that accounts for their procompetitive effects
— Interfering with freedom of contract is an unprecedented intrusion into the free market
Exclusionary contracts are “generally lawful” and are enforced by the courts under the current antitrust framework.
The FTC’s own website explains that exclusive dealings are “generally lawful” and subject to regulation only when abused. “Exclusive dealing or requirements contracts between manufacturers and retailers are common and are generally lawful. In simple terms, an exclusive dealing contract prevents a distributor from selling the products of a different manufacturer, and a requirements contract prevents a manufacturer from buying inputs from a different supplier. These arrangements are judged under a rule of reason standard, which balances any procompetitive and anticompetitive effects. Most exclusive dealing contracts are beneficial because they encourage marketing support for the manufacturer’s brand.”
There are avenues to challenge exclusive contracts, but “most exclusive-dealing agreements are both pro-competitive and legal under the antitrust laws,” says attorney Jarod Bona of Bona Law BC. “But most exclusive-dealing agreements are both pro-competitive and legal under the antitrust laws. That doesn’t mean that you can’t ever bring an antitrust action and it doesn’t mean you won’t win. But, percentage-wise, most exclusive-dealing arrangements don’t implicate the antitrust laws and are uncontroversial.”
Courts have a process for examining exclusionary contracts and deciding if they are anti-competitive, explains Sidley Austin. “Exclusive dealing can be challenged only under the Sherman Act or FTC Act. Exclusive dealing arrangements have not been considered to be per se unlawful and the courts and agencies have therefore analysed such conduct under the rule of reason. In conducting such analysis, the courts and agencies have considered a number of factors, but perhaps most important, is the percentage of commerce foreclosed within a properly defined market, and the ultimate anti-competitive effects of such foreclosure.”
Exclusionary contracts have to be analyzed on a case-by-case basis that accounts for their procompetitive effects.
Stanford Professor and antitrust scholar A. Douglas Melamed explains that distinct consideration for exclusive contracts is “problematic.” “Not all exclusionary conduct violates the antitrust laws. One reason is that exclusionary conduct, including exclusive dealing agreements, often also creates real efficiencies. Determining whether such conduct is lawful under the antitrust laws requires taking account of both the efficiencies and the exclusionary consequences of the conduct.”
— Professor Melamed continues: “Treating exclusive dealing as a unique kind of competitive restraint for which special rules are required is problematic.”
Professors Jan B. Heide, Shantanu Dutta, and Mark Bergen studied the use of exclusionary contracts and found that firms use them to avoid free-riding and are less likely to engage in such deals when they could cost consumers. “Specifically, we find evidence that firms are more likely to use exclusive dealing when there is a potential that other manufacturers can free ride on the services they provide. We also find that difficulties with evaluating distributors’ adherence to assigned restrictions decrease the likelihood of using exclusive dealing in the first place. Finally, we also find that when manufacturers are concerned about the costs that exclusive dealing imposes on end customers, such arrangements are less likely.”
Exclusivity can serve an “important competitive role,” Economics Professors Benjamin Klein and Kevin M. Murphy explains. “Competitive retailers will enter full or partial exclusive dealing contracts only if doing so permits them to successfully compete for consumers in the marketplace by offering a superior combination of price and product variety preferred by a sufficiently large group of consumers. In these circumstances it is not the role of antitrust to micro-regulate this competitive result by attempting to measure consumer gains against possible individual consumer surplus losses. Exclusivity is serving an important competitive role in these cases by intensifying demand for distribution, to the ultimate benefit of consumers.”
Interfering with freedom of contract is an unprecedented intrusion into the free market.
The FTC is moving toward standards that “encroach on the domestic economy,” cautions National Review’s Sean-Michael Pigeon. “[L]ook at the actions of the FTC, which clearly indicate that the agency is willing to use the new standards to encroach on the domestic economy. A free market of companies and ideas is a goal worth pursuing, but this is not the way towards it.”
Governments putting a “thumb on the scale” raises serious concerns about violations of the freedom of contract, explains R Street Institute’s Canyon Brimhall. “[T]here is a fundamental concern with the states interfering in private contracts between app developers and the application distribution platforms. Having states put their thumb on the scale for the benefit of one party raises serious questions about the freedom of contract, imposing new conditions on the voluntary arrangements between app stores and developers. These private parties have agreed on the terms and conditions and the resulting contract governs the outcomes. Any changes should be left to negotiations between the contracting parties.”
In a joint dissent to FTC policy changes, FTC Commissioners Christine Wilson and Noah Phillips noted the agency was “on a sweeping campaign to replace the free market system.” “The deletion of this description makes clear the majority’s intention to embark on a sweeping campaign to replace the free market system with its own enlightened views of how companies should operate, and to replace the goals of price competition, quality, and efficiency with subjective and as-yet-unstated goals that are ripe for political manipulation.”
Interfering in freedom of contract would be painting with a “broad brush,” said Rep. Spartz (R-Ind.) “We can’t paint everything with a broad brush by eliminating freedom of contract.”