Putting Lipstick on a Pig

by S.M. Oliva, Mises Economics Blog
Nov. 14, 2010

The Federal Trade Commission should be abolished. We know that will not happen anytime soon. And we should always be skeptical of proposals to “reform” or “improve” the Commission. There is no good way to do a bad thing. However, in the spirit of the newly elected Congress, I will offer three suggestions that may treat the harsher symptoms of the FTC’s ongoing presence in our society.

First, Congress can strip the FTC of its concurrent jurisdiction over the Clayton Act: In simpler terms, end the FTC’s power to review corporate mergers, which it now shares with the Justice Department’s Antitrust Division. The problem with the current “duel enforcement” regime is the FTC and DOJ play by different rules. The DOJ can only prevent or undo a merger through litigation in the Article III courts. The FTC may obtain preliminary injunctive relief from the courts, but ultimately the final decision rests with the Commission’s in-house administrative process. There are also no clear legal rules over which agency should handle which mergers; the agencies use informal agreements to divide the booty.

There is no meaningful judicial review in most FTC merger cases. As law professor Thomas A. Lambert noted in a 2008 article,
The FTC must only establish a 50 percent likelihood that there is a 50 percent chance that the merger will substantially lessen competition. This effectively means that a preliminary injunction may be granted if the FTC can show facts establishing a 25 percent likelihood that the challenged merger will substantially reduce competition.
Since a preliminary injunction almost always kills the proposed merger outright, “preliminary” means final. Getting the FTC out of the merger business would still leave the DOJ, but at least the Antitrust Division has to show at least a 50 percent likelihood of imaginary “anticompetitive” effects instead of 25 percent. Companies are more likely to stand up to the DOJ in court than the FTC.

I suspect that the antitrust bar would actually welcome an end to joint FTC/DOJ jurisdiction over mergers. While private firms certainly enjoy the lucrative business that comes with the antitrust bureaucracy, it’s confusing having to deal with two sets of bureaucrats charged with enforcing the same law under different standards. Besides, many mergers already have plenty of other agencies involved (e.g., the Federal Communications Commission, state attorneys general, etc.), so eliminating one group won’t reduce billable hours all that much. The only loser here would be the FTC.

But even without a piece of the lucrative merger racket, the FTC still exercises a wide range of powers, particularly in “consumer protection” cases, where the Commission has proven quite adept at shaking down small businessmen for “consent orders” over the most implausible arguments of consumer injury. In most consumer protection cases, there are no injured consumers at all, at least none that the FTC can identify.

Since the Commission’s inception in 1914, the FTC has been allowed to substitute its own judgment for that of the consumer: If the FTC decides a claim is “false or misleading,” it may assume that all consumers were injured and demand the offending company surrender all revenues related to the product. It is not a valid defense to argue that all, or even a majority of, customers were satisfied with their purchases. In a consumer protection case, only the FTC’s after-the-fact judgments matters.

So my second proposal is to actually hold the FTC to some burden of proof in these cases. Rep. Ron Paul has previously introduced legislation that would partially address this issue. In response to the FTC’s crackdown advertising related to non-FDA-regulated dietary supplements, Paul’s bill would establish such a burden of proof:
In every proceeding before a court or the Commission in which an advertiser of a dietary supplement or a dietary ingredient is charged with false advertising, the burden of proof shall be on the Commission to establish by clear and convincing evidence that the advertisement is false, that the advertisement actually caused consumers to be misled into believing to be true that which is false, and that but for the false advertising content the consumer would not have made the purchase at the price paid. If a claimed health benefit of a dietary supplement or dietary ingredient is alleged to be false advertising, the Commission must additionally establish based on expert scientific opinion and published peer-reviewed scientific evidence that the claim is false.
This is a good standard, but it should be applied to all FTC consumer protection cases, not just those involving dietary supplements. I would also adopt a standard similar to the constitutional requirements for a treason conviction: The FTC must produce at least two customers who can prove direct injury as a result of a seller’s false or misleading claims, or a signed admission from the seller to that effect. This would put an end to the sham of no-fault “consent orders” where the seller admits no liability but the FTC publicly declares the company guilty in a subsequent press release.

Leftists might object that any burden of proof benefits large corporations at the expense of innocent consumers. Setting aside whether that’s actually true, in practice this reform would benefit smaller, mom-and-pop stores far more then the Procter & Gambles of the world. In recent years, the FTC has taken to conducting “sweeps” of ignorant small businessmen, sending extortion letters out en masse claiming that even one non-FDA-verifiable claim on a seller’s website justifies seizing the business and personal assets of the owner. I’d say that in at least 95% of these cases, the FTC has no actual consumer complaint. Instead, the FTC assigns its “investigators” to surf the Internet -- in some cases, making fraudulent “undercover” purchases from websites -- and troll for small businessmen to harass.

Forcing the FTC to produce living, breathing customers who were injured would put an end to such shenanigans. As for the big businesses, they would still be subject to shakedowns from state attorneys general and civil lawyers.

Finally, I’d suggest a reform that at first glance appears insane and counterintuitive -- expand the size of the FTC from five to 12 members. The size of the FTC has been fixed at five since the agency’s creation nearly 100 years ago. As the US population and economy have grown, the FTC has fallen into the hands of a relatively small cabal of professional antitrust lawyers.

While the FTC’s founders pictured an organization that would represent a cross-section of legal, academic, and business expertise, in modern practice the membership is nearly monopolized by professional antitrust lawyers and career government hacks. Consider the five incumbent commissioners:

Jon Leibowitz (D), former congressional staff lawyer and lobbyist; William E. Kovacic (R), former law professor and antitrust consultant to foreign governments; J. Thomas Rosch (R), a 40-year antitrust litigator; Julie Brill (D), former assistant attorney general in Vermont and North Carolina; and Edith Ramirez (D), former antitrust litigator and law school classmate of Barack Obama.

It’s not a diverse group. And given the small number of commissioners, it’s relatively easy for one or two people to completely dominate the FTC’s agenda and staff. During the end of the Bush administration, for example, it was widely known that Commissioner Rosch effectively controlled the FTC’s litigation machinery, so much so that he was able to publicly rig at least two merger review cases by naming himself the trial judge.

The antitrust establishment is highly incestuous. In a 2005 case, the FTC imposed a consent order against Procter & Gamble. The final order was only approved by two commissioners. There was an unfilled vacancy at the time and two commissioners, including then-chairman Deborah Platt Majoras, had recused themselves. This left the remaining two commissioners -- less than a quorum -- to approve the order. The FTC later retroactively rewrote its rules to “legitimize” the vote. (Majoras, incidentally, left the FTC shortly thereafter to become general counsel at -- wait for it -- Procter & Gamble.)

Expanding the Commission would reduce, though certainly not eliminate, the risk of one or two people dominating the entire operation. It would also make outside lobbying for FTC action more difficult, as it’s harder to convince a majority of seven then a majority of three (or two). From the White House’s perspective, it would be safer to appoint non-antitrust establishment members to at least some of the commissioner positions, providing at least a chance of some viewpoint diversity.

The number 12 is, of course, somewhat arbitrary. It could just as easily be 24, 48, or 64. But 12 sounds politically plausible: It’s the size of a trial jury, the smaller federal appellate courts, and of course, the number of Apostles. Hey, if it’s good enough for Jesus, it’s good enough for the FTC.

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