Electronic copy available at: https://ssrn.com/abstract=3006294

1

Maciej Bernatt

McWane and Judicial Review of Federal Trade Commission decisions -

Any Inspirations for EU Competition Law?

Disclaimer: The final, edited version of this manuscript has been published in

38(6) European Competition Law Review 288 (2017). Please, refer to the final

version.

Abstract

The article studies how intensively the administrative decisions of the

European Commission’s counterpart - the U.S. Federal Trade Commission

(FTC) - are reviewed by the U.S. Circuit Courts of Appeal. The standard used

by the U.S. courts to review FTC factual and economic findings, known as the

‘substantial evidence test’ is examined. The main question is whether such a

standard enables both effective and yet deferential review. An examination

of U.S. case-law, and in particular of the McWane exclusive dealing case,

promotes the view that the U.S. ‘substantial evidence test’ can be an

inspiration for the improvement of judicial review in EU competition law. It

enables a thorough review of the administrative decision, while at the same

time leaving a space for deference to the FTC’s factual and economic findings

(especially when two alternative conclusions can be reached based on the

same facts). It seems to adequately balance the need for effective judicial

review (required in the European context by Article 6 ECHR) with the need

for expertise, and the inter-institutional balance in competition law. In

addition, the institutional and procedural characteristics of the

administrative proceedings before the FTC may serve as a point of reference

with respect to improvement of due process and institutional impartiality in

proceedings before the European Commission.

Assistant Professor, University of Warsaw, Faculty of Management, Department of European Economic Law (Jean Monnet Chair); Scientific Secretary, Centre for Antitrust and Regulatory Studies of University of Warsaw, MBernatt@wz.uw.edu.pl The findings presented in this article were discussed at the Competition Law Scholars Forum workshop (LUMSA, Rome, 2015) and the Next Generation of Antitrust Scholar Conference (New York University, 2016). The author would like to thank Andrew Gavil for his valuable comments. Presented article makes part of broader study on judicial deference in competition law initiated at the Loyola University School of Law in 2014. The author’s research is supported by Polish National Science Centre (decision 014/15/D/HS5/01562).

Electronic copy available at: https://ssrn.com/abstract=3006294

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1. Introduction

The intensity of judicial review of complex European Commission

(EC) economic assessments remains a hot topic in EU competition law.1

Some authors call for more intense judicial review,2 while others defend the

sufficiency of judicial review but argue that EU Courts should abandon their

margin of appreciation language.3 Assessments of the standard of judicial

review in EU competition law from the point of view of Article 6 ECHR have

also been undertaken.4 In addition, procedural changes in the process before

the EC have been proposed as an alternative to introducing more intensive

judicial review.5 The most recent studies have tried to establish when in fact

the EC performs complex economic evaluations, and when it makes manifest

errors of assessment in such evaluations.6

The aim of this article is to enrich this debate by discussing how the

administrative decisions of the EC’s counterpart – the U.S. Federal Trade

Commission (FTC) - are reviewed by the U.S. Circuit Courts of Appeal. The

standard used by the U.S. courts to review FTC factual and economic

findings, known as the ‘substantial evidence test’ is examined. The main

1 See the articles published in 2016: C. Nagy, “EU competition law’s fair trial revolution: much ado about nothing?” 37(6) E.C.L.R. 232; A. Kalintiri, “What’s in a Name? The Marginal Standard of Review of "Complex Economic Evaluations" in EU Competition Enforcement” (2016) 53(5) C.M.L.R. 1283; M. Bernatt, “Transatlantic Perspective on Judicial Deference in Administrative Law”, (2016) 22(2) Columbia Journal of European Law 275, 301-314. 2 See, for example, D. Gerard, “Breaking the EU Antitrust Enforcement Deadlock: Re-empowering the Courts?” (2011) 36 European Law Review 457; I. Forrester, “A Bush in need of pruning: The luxuriant growth of Light Judicial Review”, in C.-D. Ehlermann and M. Marquis (eds), European Competition Annual 2009: The Evaluation of Evidence and its Judicial Review in Competition Cases (Hart, 2011). See also H. Schweitzer, “The European Competition Law Enforcement System and the Evolution of Judicial Review”, (2009) Eur. Competition L. Annual 79, 140 criticizing the margin of appreciation rationale. 3 W. Wils, “The Compatibility with Fundamental Rights of the EU Antitrust Enforcement System in Which the European Commission Acts Both as Investigator and as First-Instance Decision Maker”, (2014) 37(1) World Competition. 4 M. Bernatt, “Between Menarini and Delta Pekarny – Strasbourg view on intensity of judicial review in competition law” in C. Nagy (ed), The procedural aspects of the application of competition law: European frameworks – Central European perspectives (Europa Law Publishing, 2016). 5 R. Nazzini, “Administrative Enforcement, Judicial Review and Fundamental Rights in EU Competition Law: A Comparative Contextual-Functionalist Perspective”, (2012) 49 C.M.L.R. 971. See also M. Bernatt, “Transatlantic Perspective on Judicial Deference in Administrative Law”, (2016) 22(2) Columbia Journal of European Law 275, 325. 6 A. Kalintiri, “What’s in a Name? The Marginal Standard of Review of Complex Economic Evaluations in EU Competition Enforcement” (2016) 53(5) C.M.L.R. 1283, 1295-1305.

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question is whether such a standard enables both effective and yet

deferential review. This article assumes that the deferential model of judicial

review should not be rejected as such. It is supported by reasons of

efficiency, separation of powers principles, and the expert character of

administrative decision-making in the field of competition law. Thus, the

question is how to build a model of judicial review and overall

administrative process such that the decisions of competition authorities

are effectively reviewed, while maintaining and guaranteeing an inter-

institutional balance between administrative bodies and courts. An

examination of U.S. case-law, and in particular of the McWane exclusive

dealing case, may help promote the view that the U.S. ‘substantial evidence

test’ can be an inspiration for the improvement of judicial review in EU

competition law. In addition, the institutional and procedural characteristics

of the proceedings before the FTC may serve as a point of reference with

respect to reforms of the parallel proceedings before the EC.

2. Administrative Enforcement of U.S. Antitrust Law and Judicial

Review of FTC decisions – a relevant comparison with the EU system

Some commentators believe that procedural comparisons between

the U.S. system of antitrust law and the EU system of competition law are

irrelevant.7 It is true that U.S. antitrust law, most importantly the Sherman

Act and the Clayton Act, are enforced predominantly by means of civil law

suits brought either by private parties or by Federal antitrust agencies - the

Antitrust Division of the Department of Justice (DoJ) and the FTC.8 The U.S.

model differs from the administrative model of EU competition law

enforcement, which relies on predominantly public enforcement of Articles

101-102 TFEU by the EC, subject to review by EU courts. Despite the

differences however, there is space for comparison, particularly with

7 See J. Laguna de Paz, “Understanding the limits of judicial review in European Competition Law”, (2014) 2(1) Journal of Antitrust Enforcement 1, 6. 8 The FTC does not have the power to directly enforce the Sherman Act. However, the FTC enforcement of the prohibition of ‘unfair methods of competition’ under sec. 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, amounts to indirect enforcement of sec. 1 and sec. 2 of the Sherman Act.

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respect to the administrative enforcement of sec. 5 of the FTC Act by the FTC

and the judicial review of the FTC’s administrative decisions.

This is so because FTC antitrust enforcement of sec. 5 of the FTC Act,

which prohibits open-ended ‘unfair methods of competition’ (15 U.S.C. § 45),

takes place by means of an administrative process.9 Section 5(b) of the FTC

Act authorizes the FTC to institute an administrative adjudicatory

proceeding to address acts or practices that amount to ‘unfair methods of

competition’, which may include violations of sec. 1 and sec. 2 of the

Sherman Act, sec. 11 of the Clayton Act10, as well as other practices violating

the spirit of antitrust laws.11 Decisions adopted by the FTC in two-instance

administrative proceedings are subject to judicial review of a similar kind to

that of EC decisions. The addressees of cease-and-desist orders12 issued by

the FTC under sec. 5 of the FTC Act, may obtain a review of such orders by a

U.S. Circuit Court of Appeals.13 The latter, similarly to the EU General Court,

acts as a reviewing court. It has the right to affirm, modify, or set aside the

decision of the FTC14 and reviews both legal and factual issues.

3. The McWane Case and Judicial Review of FTC Factual Findings

What judicial review of FTC sec. 5 decisions looks like is well-

illustrated by the McWane case. The case concerned an alleged exclusive

9 Section 13(b) of the FTC Act gives the FTC the power to seek temporary and permanent injunctions in federal district courts for violations of the FTC Act; 15 U.S.C. § 53 (b). For this reason sec. 5 of the FTC Act can also serve as the legal basis for an FTC civil suit against the firm believed to be engaged in unfair methods of competition. The FTC opted for civil enforcement of sec. 5 of the FTC Act in, for example, Actavis, a salient pay-for-delay case; see FTC v. Actavis, Inc., 570 U.S. 756 (2013). 10 Section 5(b) of the FTC Act authorizes the FTC to challenge potentially anticompetitive mergers under sec. 11 of the Clayton Act. 11 Under ‘stand alone’ sec. 5 authority, the FTC may potentially address acts or practices that are anticompetitive but may not fall within the scope of the Sherman or Clayton Act. See the FTC “Statement of Enforcement Principles Regarding “Unfair Methods of Competition” under Section 5 of the FTC Act” of 13 August 2015, www.ftc.gov [accessed 19 Jan 2017]. It is argued that ‘stand alone’ sec. 5 authority empowers the FTC to challenge anticompetitive practices such as a monopoly in its incipiency, or cartel-like behavior in oligopolistic markets. See H. Hovenkamp, “The Federal Trade Commission and the Sherman Act”, (2010) 62 Florida Law Review 871, 878-884. 12 The FTC is not empowered under sec. 5 of the FTC Act to impose fines. It issues orders to cease and desist to any person, partnership, or corporation found to be using unfair methods of competition. 13 15 U.S.C. §§ 21(c), 45(c). 14 15 U.S.C. § 45 c.

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dealing practice by the former only producer of U.S. domestic pipe fittings.15

In 2009 McWane adopted a policy of exclusivity (under the name ‘Full

Support Program’) after its competitor (Star) had decided to enter the

market of domestic pipe fittings.16 McWane announced to its distributors

that unless they bought all of their domestic fittings from McWane, they

would lose their rebates and be cut off from purchases for 12 weeks. The

statements of McWane executives, revealed during the proceedings,

suggested that the Full Support Program was meant to discourage McWane

distributors from dealing with Star and thus to raise Star’s costs and impede

it from becoming a viable competitor. The Full Support Program was

implemented in practice. The two largest U.S. waterworks distributors

prohibited their branches from purchasing domestic fittings from Star. In

addition, McWane stopped supplying one of its distributors who entered

into dealings with Star. Despite McWane’s policy Star managed to enter the

market, gaining a 5% market share in 2010 and a 10% share in 2011. In

January 2010 the FTC issued an administrative complaint, charging McWane

with violating sec. 5 of the FTC Act. In February 2012 the Full Commission’s

2nd instance decision was adopted.17 McWane was ordered to stop requiring

exclusivity from distributors, based on a finding that its exclusive dealing

policy (under the Full Support Program) constituted the unlawful

maintenance of a monopoly in violation of sec. 5 of the FTC Act. The FTC

decision was appealed by McWane to the Court of Appeals for the 11th

Circuit. On April 15, 2015 the 11th Circuit Court of Appeals upheld the FTC

decision.18 McWane’s Petition for Certiorari to the U.S. Supreme Court was

not granted, thus making the 11th Circuit Court’s judgment final.

15Domestic pipe fittings connect domestic water system with an external water infrastructure system. 16 Star decided to enter the market because at that time publicly funded investments in waterworks projects were growing in U.S. 17 The FTC Full Board decision upheld the ALJ decision when it with respect to count 6 only (‘unlawful maintenance of a monopoly’). The Commission dismissed the other six original counts. See the FTC opinion of 6 February 2014 in the Matter of McWane, Inc. and Star Pipe Products, Ltd., http://www.ftc.gov/enforcement/cases-proceedings/101-0080b/mcwane-inc-star-pipe-products-ltd-matter [accessed 19 Jan 2017]. 18McWane, Inc. v. F.T.C., 783 F.3d 814 (11th Cir. 2015).

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From the point of view of comparison with the similar EU procedures,

the 11th Circuit Court’s opinion in McWane is an interesting example of how

intensively the U.S. courts review the FTC’s factual and economic findings

related to market definition, monopoly power, harm to competition, and

pro-competitive benefits - areas considered by the EU judicature to involve

complex economic assessments.19 McWane is especially instructive when it

comes to the notions of ‘monopoly power’ and ‘harm to competition’.

In its review of the FTC findings, the 11th Circuit Court applied the

substantial evidence test20 - a standard of review long used by U.S. Circuit

Courts of Appeal to review facts established in the decisions of

administrative agencies.21 Under this test the court shall see as unlawful, and

set aside, any action of an agency found to be unsupported by substantial

evidence.22 Conversely, the court must accept the agency’s findings of fact if

they are supported by substantial evidence, defined as “such relevant

evidence as a reasonable mind might accept as adequate to support a

conclusion.”23

In its opinion in McWane the 11th Circuit Court took the position that

under the substantial evidence test it is not necessary for all the evidence to

point uniformly against the defendant - it is sufficient if a substantial part of

it does so.24 Notably, and notwithstanding the fact that Star managed to

19 See A. Kalintiri, “What’s in a Name? The Marginal Standard of Review of Complex Economic Evaluations" in EU Competition Enforcement” (2016) 53(5) C.M.L.R. 1283, 1290-1291. 20 The FTC Act provides that the findings of the FTC as to the facts, if supported by evidence, shall be conclusive, 15 U.S.C. § 45(c). This standard has been found to be “essentially identical” to the substantial evidence test under the Administrative Procedure Act. See FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 454 (1986). 21 See Universal Camera Corp. v. NLRB, 340 U.S. 474, 490 (1951). The judicially developed substantial evidence test was incorporated into Section 706(2)(E) of Administrative Procedure Act, 5 U.S. Code § 706. 22 Universal Camera, 340 U.S., at 490. 23 Universal Camera, 340 U.S., at 490. In other words, “substantial evidence is evidence that provides a substantial basis of fact from which the fact in issue can be reasonably inferred”, see Diamond M. Drilling Co. v. Marshall, 577 F.2d 1003, 1006 (5th Cir. 1978). It is argued that “the term ‘substantial evidence’ should be construed to confer finality upon an administrative decision on the facts when, upon an examination of the entire record, the evidence, including the inferences therefrom, is found to be such that a reasonable man, acting reasonably, might have reached the decision.” See E. Stason, “Substantial Evidence in Administrative Law”, (1941) 89 University of Pennsylvania Law Review 1026, 1038. 24 McWane, 783 F.3d, at 840.

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enter the market despite McWane’s exclusivity policy, the Court found that

McWane possessed a monopoly power.25 The Court was satisfied with the

evidence and arguments put forward by the FTC: McWane’s overwhelming

market share (90%); the large capital outlays required to enter the domestic

fittings market; and McWane’s undeniable power over domestic fittings

prices (despite Star’s successful entrance on the market).26 The Court sided

with the FTC, even though - as the Court acknowledged - some U.S. case-law

could suggest that a successful entry on the market is an argument against

finding a market power.27 The theory put forward by the FTC (a theory

found to be supported by substantial evidence) was affirmed by the Court,

despite the possibility of an alternative finding.

Following a similarly effective review (a thorough check as to

whether the FTC’s conclusions were supported by evidence), the Court of

Appeals for the 11th Circuit deferred also to the FTC’s assessment regarding

harm to competition.28 The Court agreed with the FTC that McWane’s

exclusive dealing policy had the probable effect of harming the competition.

It did not require, (as the dissenting FTC Commissioner Wright argued for)

that the FTC had to show clear evidence of an anticompetitive effect.29 Such

an approach was of key importance because McWane claimed that the FTC

did not adequately prove that the Full Support Program was responsible for

keeping prices at a supra-competitive level. While the Court agreed that

“there could have been other causes for the price behavior”,30 nevertheless

it held that “the government need not demonstrate that the Full Support

Program was the sole cause - only that the program reasonably appear[ed]

to be a significant contribution to maintaining [McWane’s] monopoly

power.”31 In other words, the Court did not exclude the possibility that there

could have been reasons other than the functioning of the Full Support

Program for the high prices charged by McWane. Yet despite such a potential

25 McWane, 783 F.3d, at 831-832. 26 McWane, 783 F.3d, at 832. 27 McWane, 783 F.3d, at 831-832. 28McWane, 783 F.3d, at 836. 29McWane, 783 F.3d, at 836 30McWane, 783 F.3d, at 839. 31McWane, 783 F.3d, at 839.

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alternative conclusion, the Court deferred to the FTC’s finding. The Court

noted in this respect that the mere fact that “two inconsistent conclusions”

could be drawn from the record did not prevent the FTC’s finding from being

supported by substantial evidence.32

To sum up, we may say that the review of the FTC decision in McWane

was both effective and deferential towards the FTC’s conclusions. Only after

discussing in detail the arguments raised by the parties, and thoroughly

checking whether the FTC’s findings regarding market definition, monopoly

power, harm to competition and pro-competitive benefits were supported

by the evidence, did the Court defer to the FTC’s findings discussed above.

In its review the Court struck a proper balance between the need for

safeguarding appropriate checks on administrative actions and the need for

inter-institutional balance. It declared that its role is to vigorously review

the administration action, rather than replace it with its own judgment.

4. The application of the ‘substantial evidence’ test by U.S. Courts in

antitrust cases

In order to draw broader inspirations from McWane vis-à-vis EU

competition law, a broader look is required at how the substantial evidence

test is applied by U.S. appellate courts when reviewing FTC sec. 5 decisions.

Several observations can be made.

First, cases other than McWane also confirm that both ordinary

factual findings as well as economic ones are reviewed using this test.33

Unlike the EU courts, the U.S. appellate courts do not apply a different

standard of review for ordinary facts (in the EU’s ‘correctness’ test) and

complex economic assessments (in the EU’s ‘manifest error of assessment’

standard).

32McWane, 783 F.3d, at 839. 33 Hosp. Corp. of Am. v. FTC, 807 F.2d 1381, 1385 (7th Cir.1986) (“[T]he substantial evidence rule (like the clearly erroneous rule) applies to ultimate as well as underlying facts, including economic judgments.... [T]he ultimate question under the Clayton Act—whether the challenged transaction may substantially lessen competition—is governed by the substantial evidence rule.” )

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Second, the role of court is a review of the FTC decision, not de novo

decision-making. Under the substantial evidence test, the court reviewing

FTC decisions should not “make its own appraisal of the testimony, picking

and choosing for itself among uncertain and conflicting inferences.”34 The

court must accept the FTC’s findings of fact, provided they are supported by

substantial evidence.

Third, where there is the possibility of drawing two inconsistent

inferences from the evidence, it is for the FTC to make the choice.35

Fourth, the appellate courts tend to frame the issues disputed at the

appeal level as questions of facts,36 and not as questions of law.37 This leads

to the application of the substantial evidence test as a coherent platform of

judicial review applied to the various questions reviewed, and possibly

translates into greater legal certainty for the parties. They may expect the

application of the substantial evidence test whatever the nature of the

disputed issue.

Fifth, the substantial evidence test has proven to be a flexible and

effective platform for exercising judicial review in the antitrust field. In

applying it, the appellate courts have shown that they are ready to overrule

the an FTC decision. For example, in Rambus the Court held that the FTC

failed to prove a ‘dangerous probability’ that Rambus would monopolize the

34 FTC v. Algoma Lumber Co., 291 U.S. 67, 73 (1934); Realcomp II, Ltd. v. F.T.C., 635 F.3d 815, 823 (6th Cir. 2011). 35 Gibson v. F. T. C., 682 F.2d 554, 568-69 (5th Cir. 1982). See also Consolo v. Federal Maritime Commission, 383 U.S. 607, 620 (1966). 36 N.C. State Bd. of Dental Exam’rs v. FTC, 717 F.3d 359, 374 (4th Cir.2013) (where the substantial evidence standard was applied to the FTC’s determination that the defendant’s behavior “was likely to cause significant anticompetitive harms”); N. Tex. Specialty Physicians v. FTC, 528 F.3d 346, 370 (5th Cir.2008) (where the substantial evidence standard was applied to the FTC’s determination that defendant’s conduct “amounted to horizontal price-fixing that is unrelated to competitive efficiencies” under Section 1 of the Sherman Act); Gibson v. FTC, 682 F.2d 554, 571 (5th Cir.1982) (where the substantial evidence standard was applied to the FTC’s finding of illegal brokerage in violation of Clayton Act § 2(c)); RSR Corp. v. FTC, 602 F.2d 1317, 1320, 1324–25 (9th Cir.1979) (where the substantial evidence standard was applied to the FTC’s finding under Section 7 of the Clayton Act that the merger was anticompetitive). 37 It has been observed that in practice in FTC cases U.S. Circuit Courts of Appeal do not apply a test relevant for the review of questions of law, but opt for the substantial evidence test, see M. Bernatt, “Transatlantic Perspective on Judicial Deference in Administrative Law”, (2016) 22(2) Columbia Journal of European Law 275, 316-318.

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market.38 Along similar lines, in Schering the 11th Circuit held that the

evidence did not support the finding that settlement agreements

unreasonably restrained competition beyond the exclusionary effects of the

patent.39

Sixth, cases other than McWane show that under the substantial

evidence test there is room for the courts to defer to FTC determinations of

both a factual and economic nature. In Realcomp II of 2011, a case

concerning an allegedly anti-competitive website policy of real-estate

brokers,40 the Court of Appeals for the 6th Circuit, declaring that it was

“giving some deference to the Commission conclusion”, found that the FTC

properly rejected Realcomp’s proffered pro-competitive justifications,

seeing them as not “legitimate, plausible, substantial and reasonable.”41 A

similar approach was taken in another 6th Circuit Court decision in Detroit

Auto Dealers Association, concerning an alleged unlawful restraint on trade

by car dealers’ limit of showroom hours in violation of sec. 5 of the FTC Act.42

The Court deferred to one of the FTC’s findings concerning the relevance of

a comparison between withholding relevant cost information by the Indiana

Federation of Dentists,43 and restricting showroom hours by the Detroit

Auto Dealers Association (which was a relevant fact for the finding of an

actual price increase).44 The Court observed that “(w)e perceive some

difference between withholding of relevant cost information and restricting

showroom hours, but in deference to the Commission, we are not prepared

to hold the analogy to be erroneous.”45 Another example of a deferential

approach may be found in Chicago Bridge & Iron, a case concerning an illegal

38 Rambus Inc. v. F.T.C., 522 F.3d 456 (D.C. Cir. 2008). 39 Schering-Plough Corporation v. F.T.C., 402 F.3d 1056, 1062 (11th Cir. 2005). 40 The association was considered by the FTC to have adopted an anti-competitive website policy which prohibited information about nontraditional listings on the association's multiple listing service from being distributed to public real-estate advertising websites. 41 Realcomp II, Ltd. v. F.T.C., 635 F.3d 815, 834 (6th Cir. 2011). 42 In re Detroit Auto Dealers Ass'n, Inc., 955 F.2d 457, 469-70 (6th Cir. 1992). 43 See FTC v. Ind. Fed’n of Dentists, 476 U.S. 447 (1986). 44 In re Detroit Auto Dealers, 955 F.2d at 471-72, where the 6th Circuit noted that dentists in Indiana Federation of Dentists denied to their patients and insurers relevant information whereby costs ultimately could be expected to be effected, and thus the Court held that an actual price increase was not required to be proven even under the rule of reason. 45In re Detroit Auto Dealers, 955 F.2d at 471-72.

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acquisition by Chicago Bridge & Iron of its competitor’s assets in violation of

sec. 7 of the Clayton Act and sec. 5 of the FTC Act.46 The Court of Appeals for

the 5th Circuit deferred to the FTC’s finding, stating that the defendant had

failed to rebut the FTC’s finding as to the existence of barriers to entry.47 The

5th Circuit declared that “[b]ased on the substantial evidence standard, as

long as the Commission derives a ‘reasonable inference’ from the evidence

that CB&I failed to rebut the prima facie case, we defer to the Commission's

findings.”48 Probably the most deferential understanding of the substantial

evidence test was presented by 7th Circuit Court in Hospital Corp. of America.

The Court observed that “our only function is to determine whether the

Commission's analysis of the probable effects of these acquisitions on

hospital competition in Chattanooga is so implausible, so feebly supported

by the record, that it flunks even the deferential test of substantial

evidence.”49 The 7th Circuit also relied on this test in Toys ‘R’ Us to defer to

FTC’s finding, even though there was some evidence supporting the

petitioner’s opinion. The Court observed that it only needs to “decide

whether the inference the Commission drew of a horizontal agreement was

a permissible one from that evidence, not if it was the only possible one.”50

To sum up, an analysis of the application of the ‘substantial evidence

test’ in the appellate review of FTC antitrust cases confirms its potential as

a workable platform for effective and coherent judicial review. At the same

time, it leaves space for a deferential approach, especially when two

alternative conclusions may be drawn and the competition authority

provides evidence supporting one of them. Importantly, when considering

the EU perspective the ‘substantial evidence test’ is clearly articulated and

used consistently in the justifications of the opinions of the U.S. Circuit

Courts of Appeal.

5. Characteristics of the FTC that underlie deferential review

46 Chicago Bridge & Iron Co. N.V. v. F.T.C., 534 F.3d 410, (5th Cir. 2008). 47 Chicago Bridge & Iron, 534 F.3d at 437. 48 Chicago Bridge & Iron, 534 F.3d at 437. 49 Hospital Corp. of America v. F.T.C., 807 F.2d 1381, 1385 (7th Cir.1986). 50 Toys "R'' Us, Inc. v. F.T.C., 221 F.3d 928, 935 (7th Cir. 2000).

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Previous studies of U.S. administrative law and ECHR standards have

shown that the greater are the due process guarantees in administrative

proceedings and institutional safeguards of the impartiality of

administrative authorities (the division between

investigatory/prosecutorial and decision-making functions), the more

extensive the judicial deference can be.51 In addition, the expertise of an

administrative authority may be considered as an argument for a less

intensive judicial review.52 In the context of the calls to reform the

proceedings before the EC, it is worthwhile to discuss these features of the

FTC that support the permissibility of a deferential judicial review of its

decisions.

5.1. Expertise

When it comes to the case-law of U.S. Circuit Courts of Appeals

concerning FTC antitrust decisions, the expertise of the FTC appears as the

main reason underlying the declared “some deference” to FTC statutory

interpretations (which concerns the judicial review of questions of law). In

E.I. du Pont de Nemours, the Court of Appeals for the 2nd Circuit pointed out

that the vague character of the language in sec. 5 (e.g. lack of a definition of

what is ‘unfair’) shows that Congress sought to provide broad and flexible

authority to the FTC – as an administrative body with broad business and

economic expertise – so that the FTC could preserve business freedom to

compete from restraints.53 A similar observation is also reflected in earlier

Supreme Court opinions in Atlantic Refining and in Texaco.54 In addition, the

U.S. Supreme Court case of Keppel & Bro. confirms that expertise plays a role

in the assessment whether the substantial evidence test was met.55 In this

light, the fact that the FTC was accorded deference under the substantial

51 M. Bernatt, “Transatlantic Perspective on Judicial Deference in Administrative Law”, (2016) 22(2) Columbia Journal of European Law 275, 324-325. 52 M. Bernatt, “Transatlantic Perspective on Judicial Deference in Administrative Law”, (2016) 22(2) Columbia Journal of European Law 275, 324-325. 53 E.I. du Pont de Nemours & Co. v. F.T.C., 729 F.2d 128, 136 (2d Cir. 1984). See Report of the Conference Committee, H.R.Rep. No. 1142, 63d Cong., 2d Sess. 19 (1914). 54Atlantic Refining Co. v. FTC, 381 U.S. 357, 367 (1965). See also FTC v. Texaco, Inc., 393 U.S. 223, 226 (1968). 55 Fed. Trade Comm'n v. R.F. Keppel & Bro., 291 U.S. 304, 314 (1934).

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evidence test (in Realcomp II, Detroit Auto Dealers Association, Chicago

Bridge, Hospital Corp. of America and McWane) could also have stemmed

from the fact that the FTC was perceived as an expert-body which is better

placed to deal with complex evidentiary issues.56 In particular, in McWane

the Court rejected the defendant’s argument that market definition should

have been based on an econometric analysis.57 The Court was satisfied with

qualitative economic evidence provided by the FTC, and its reliance on the

‘hypothetical monopolist’ test provided by the complaint counsel’s expert

witness.58

There are also institutional arguments why the FTC may be

considered by courts to be an expert body well-suited for developing

competition policy. Scholars stress the strength of the FTC’s economic

analyses, which stem from the large number of economists that it employs

(many of them hold PhDs in economics).59 Crucially for the quality of the

FTC’s legal actions, economists take part in proceedings, run

administratively under sec. 5 of the FTC Act.60 FTC economists are directly

involved in the case and they work together with staff attorneys. They also

issue a separate opinion about the case before the complaint is voted on by

the FTC Commissioners.61 The opinion of FTC economists is on equal footing

with that of its lawyers, and it happens that the economists’ opinion

influences the outcome of the case.62 The specialization of the economists

involved reflects the subject matter of the case.63 Certain concerns about the

56 FTC expertise is clearly articulated in the cases decided under the consumer part of sec. 5 of the FTC Act (unfair or deceptive acts or practices). The courts “are mindful of the Commission's special expertise in determining what sort of substantiation is necessary to assure that advertising is not deceptive.”, POM Wonderful, LLC v. F.T.C., 777 F.3d 478, 493 (D.C. Cir. 2015). See also FTC v. Colgate–Palmolive Co., 380 U.S. 374, 385 (1965). 57McWane, 783 F.3d, at 829-830. 58McWane, 783 F.3d, at 829-830. 59 H. First, E. Fox, D. Hemli, “Procedural and Institutional Norms in Antitrust Enforcement: The U.S. System”, (2012) 303 New York University Law and Economics Working Papers 43-44. 60 M. Salinger, P. Pautler, “The Bureau of Economics at the US Federal Trade Commission”, http://www.ftc.gov/be/recruit/06beover.pdf[accessed 19 Jan 2017]. 61 M. Salinger, P. Pautler, “The Bureau of Economics at the US Federal Trade Commission”, http://www.ftc.gov/be/recruit/06beover.pdf[accessed 19 Jan 2017]. 62 H. First, E. Fox, D. Hemli, “Procedural and Institutional Norms in Antitrust Enforcement: The U.S. System”, (2012) 303 New York University Law and Economics Working Papers 44. 63 H. First, E. Fox, D. Hemli, “Procedural and Institutional Norms in Antitrust Enforcement: The U.S. System”, (2012) 303 New York University Law and Economics Working Papers 44.

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political appointment process of FTC Commissioners (i.e. their potential lack

of expert knowledge)64 do not seem have materialized. On the other hand,

the problematic lack of expert-knowledge by the Administrative Law Judge

(ALJ, the first instance decision-maker)65 is overcome by the two-instance

administrative procedure system and the fact that the ALJ’s initial decision

is reviewed by the Full Board of the FTC on a de novo basis.

The similarity in the characteristics of the EU competition law

enforcement process (e.g. the large number of economists employed directly

in the DG Competition, and the role played by the Chief Competition

Economist and his team66) may thus serve as an argument for some

deference to the Commission’s complex economic assessments.

5.2. Procedural and institutional safeguards

The proceedings before the FTC offer far-reaching due process

safeguards. In addition, institutional impartiality is guaranteed. These

safeguards are often more far-reaching than in EU competition proceedings.

To begin with, the addressee of an FTC complaint has the full right to

be heard. This includes a right to due notice, cross-examination of witnesses,

presentation of evidence, as well as the broad possibility to present its views

at oral hearings before a decision-maker (the ALJ in the first instance;67 and

the Full FTC Board in the second instance).68 All five FTC Commissioners are

involved in the decision-making process. Crucially, the parties have the

64 See W. Kovacic, “The Quality of Appointments and the Capability of the Federal Trade Commission”, 49 Administrative Law Review 915, 916-917 (1997). 65 H. First, E. Fox, D. Hemli, “Procedural and Institutional Norms in Antitrust Enforcement: The U.S. System”, (2012) 303 New York University Law and Economics Working Papers 46. 66 I. Lianos, A. Andreangeli, “The European Union, The Competition Law System and the Union’s Norms” in E. Fox, M. Trebilcock (eds), The Design of Competition Law Institutions: Global Norms, Local Choices, Oxford University Press, 2013) 432-433. They underline that the Chief Competition Economist gives economic guidance to the DG Competition case teams from the early stages of the proceedings, and acts as a check on the adoption of individual decisions. See also J. Baker, “My Summer Vacation at the European Commission”, Antitrust Source, September 2005, 3. 67 The Administrative Law Judge, in contrast to the EU Commission Hearing Officer, is a true first-instance, independent decision maker. 68 Electronic Code of Federal Regulations, Title 16, Part 3, Subpart E, §3.41(c) (Every party, except intervenors, whose rights are determined under §3.14, shall have the right of due notice, cross-examination, presentation of evidence, objection, motion, argument, and all other rights essential to a fair hearing.).

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possibility to meet each of the Commissioners before they vote on a

complaint.69 Overall, the process before the FTC gives room for testing not

only anti-competitive but also pro-competitive theories.70 The possibility of

oral presentation of evidence before administrative decision-makers is

certainly broader than in the case of the EC.

On the institutional side, the FTC is an agency independent from the

executive power.71 The Commissioners are elected for a fixed, seven-year-

term.72 Their decisions are not subject to the supervision of the U.S.

President. Crucially, the President is allowed to remove a FTC Commissioner

only if specified conditions are met.73

In addition, the impartiality of the FTC is guaranteed - it is a collegial

body and only three out of the five Commissioners can belong to the same

political party.74 Proceedings are adversary in nature: during the first stage,

proceedings take place before an impartial ALJ, without involvement of the

FTC Commissioners.75 It is for the FTC counsel to prove that sec. 5 of the FTC

Act was violated. During the second stage of the proceedings, decisions are

taken by the Full Board of the FTC and individual Commissioners have the

right to issue dissenting opinions. It has been observed in the literature that

the occasional practice of appointing a Commissioner to serve as the ALJ is

controversial from point of view of the FTC’s impartiality.76 In any case, the

69 H. First, E. Fox, D. Hemli, “Procedural and Institutional Norms in Antitrust Enforcement: The U.S. System”, (2012) 303 New York University Law and Economics Working Papers, 22. 70 J. Baker, “My Summer Vacation at the European Commission”, Antitrust Source, September 2005, 3. 71 Humphrey's Executor v. U.S., 295 U.S. 602, 628 (1935). 72 15 U.S.C. § 41. The Commissioners are appointed by the President, subject to Senate confirmation. 73 Humphrey's Executor, 295 U.S., at 622. The power of the U.S. President to remove members of the FTC is limited to removal for specific causes enumerated by statute, permitting removal for inefficiency, neglect of duty, or malfeasance in office, 15 U.S.C. § 41. 74 15 U.S.C. § 41. 75 It is underscored that the FTC Commissioners are ‘walled-off’ from discussion of a matter with FTC staff while the matter is under adjudication. See W. Wils, “The Combination of the Investigative and Prosecutorial Function and the Adjudicative Function in EC Antitrust Enforcement: A Legal and Economic Analysis”, (2004) 27(2) World Competition 202 (2004), available at SSRN, at 7. 76 W. Wils, “The Combination of the Investigative and Prosecutorial Function and the Adjudicative Function in EC Antitrust Enforcement: A Legal and Economic Analysis”, (2004) 27(2) World Competition 202 (2004), available at SSRN, at 24-25. Potential conflicts are most apparent “when FTC Commissioners vote on complaints and then sit as administrative law judges” (see at 60-61). Recusal of the FTC Commissioner to vote on the

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FTC institutional structure guarantees impartiality to a significant extent

(greater than the institutional structure of the EC). In practice different

individuals are responsible for the investigation (members of FTC Bureau of

Competition) and for the decision-making (FTC Commissioners and the

ALJ). The 2014 FTC decision in McWane also proves that the second instance

Full FTC Board is ready and willing to dismiss a majority of counts raised

against the respondent in the FTC complaint.77

6. Conclusions

Based on the above, the following conclusions can be offered:

First, similarly to the situation in the EU, objections against FTC

decisions raised before courts are framed as questions of fact rather than

questions of law. They are reviewed under the ‘substantial evidence test’.

This test is applied by U.S. Circuit Courts of Appeal consistently when

reviewing FTC decisions based on sec. 5 of the FTC Act. The substantial

evidence test enables a thorough review of the administrative decision,

while at the same time leaving a space for deference to the FTC’s factual and

economic findings (especially when two alternative conclusions can be

reached based on the same facts). It seems to adequately balance the need

for effective judicial review (required in the European context by Article 6

ECHR) with the need for expertise, and maintains the inter-institutional

balance in competition law. Therefore, the ‘substantial evidence test’ can be

complaint remedies such a shortcoming. However, for a criticism see D. Balto, “The FTC at a Crossroads: Can It Be Both Prosecutor and Judge?”, Legal Backgrounder, April 23, 2013. The U.S. Supreme Court has declared that “[t]he initial charge or determination of probable cause and the ultimate adjudication have different bases and purposes. The fact that the same agency makes them in tandem and that they relate to the same issues does not result in a procedural due process violation.” See Withrow v. Larkin, 421 U.S. 35, 58 (1975). This is also true in the context of FTC powers, see: Cinderella Career & Finishing Schools, Inc., 404 F.2d 1308, 1315 (D.C. Cir. 1968) and Kennecott Copper Corp. v. FTC, 467 F.2d 67, 79 (10th Cir. 1972). 77 The FTC Full Board upheld only count 6 (unlawful maintenance of a monopoly) out of the 7 counts raised in the FTC complaint. See the FTC opinion of 6 February 2014 in the Matter of McWane, Inc., and Star Pipe Products, Ltd., http://www.ftc.gov/enforcement/cases-proceedings/101-0080b/mcwane-inc-star-pipe-products-ltd-matter. In the past concerns have been expressed (under FTC merger proceedings) about the FTC’s ‘prosecutorial bias’ – the argument being that the FTC Commissioners initial vote on a complaint influences their subsequent second instance decision. See the study by Malcolm Coate and Andrew Kleit, discussed by Wouter Wils, supra note 126, at 21.

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considered as a point of reference in the ongoing European discussion on

how to bring more clarity and stability to judicial review in EU competition

law. In particular, it is interesting that the U.S. courts use one standard of

review for both general and economic facts. Such an approach makes it

possible to avoid the controversies which take place in the EU over what

constitutes a complex economic assessment, to which a formally less intense

standard of judicial review should be applied.

Second, the proceedings before the FTC offer significant procedural

and institutional guarantees. Importantly, many safeguards exist in U.S. law

(right to cross-examine witnesses, the importance of oral hearings and of

direct contact with the decision-maker, as well as the separation of

investigatory and decision-making functions), which puts the

administrative process before the FTC in a better light than that employed

in the EC. The FTC procedural system, seen together with FTC expertise

(similar to that of the EC), provides an argument for the appropriateness of

a deferential standard of review of the FTC’s factual and economic findings.

Viewed in this light, further developments with respect to the fairness of

competition proceedings before the EC, as well as the introduction of its

greater institutional impartiality, could serve as an argument against calls

for a more intensive judicial review of EC decisions. What’s more, the use of

more trial-like procedures before the EC (while avoiding the exaggerations

of the U.S. adversarial system78) would better prepare the EC staff for

defending its anticompetitive theory at the appeal level before EU courts. It

would also give the EC some space to ask the EU Courts for deference to one

of the possible alternatives consciously adopted in the EC decision. Such an

approach would be certainly more convincing and transparent than relying

on the margin of appreciation doctrine without explaining in detail how and

why the EC made a particular economic assessment that underlies its

decision.

78 See J. Baker, “My Summer Vacation at the European Commission”, Antitrust Source, September 2005, 5, noting in the context of U.S. merger review that “the extensive evidentiary production in the typical second request, supplied by the merging parties at great expense and substantial loss of executive time, is largely chaff and not wheat.”