FTC chair plays the long game

Lina Khan has served as the Chair of the Federal Trade Commission for just 26 months, but already some commentators have declared her tenure a failure. The criticism has focused largely on two recent, high profile efforts by the FTC to block mergers – of Meta with virtual reality creator Within and of Microsoft with video game producer Activision Blizzard – which failed to persuade district judges in the Northern District of California in February and July 2023, respectively. Ms. Khan’s asserted agenda to rewrite U.S. antitrust enforcement is misguided and overly ambitious, her critics say, and have only impaired enforcement efforts by revealing the FTC to be a “paper tiger.”

Such critiques are premature. Moreover, it is not clear that the FTC’s enforcement actions have been failures at all.

Ms. Khan burst onto the antitrust scene as a law student in 2017, with her blockbuster Yale Law Journal note lamenting the allegedly anemic state of antitrust enforcement in the wake of the Chicago School’s influential focus on “consumer welfare.” According to Ms. Khan, the legislators behind the Sherman, Clayton, and Robinson-Patman Acts were motivated by a desire to promote a wide range of public benefits – such as market access, innovation, and fair trade considerations – in addition to fostering competition. Concentration of financial power was viewed as a threat to liberty and the public good, she argued, even if its ill effects were not immediately apparent. A decentralized economy, with multiple players competing freely against one another, was thought necessary to prevent monopolistic behavior such as squeezing suppliers and refusing to do business with (“foreclosing”) competitors. Amazon (and particularly its power over sellers) was presented as an object lesson in the market distortion attributable to an allegedly myopic focus on price and output to the exclusion of other sources of consumer welfare.

Ms. Khan’s focus on market structure put her at odds with the prevailing antitrust philosophy. Proponents of the Chicago School, including Judges Robert Bork and Richard Posner, have long taught that vertical integration generates procompetitive efficiencies that can outweigh any theoretical anticompetitive effect. As long as a supposedly anticompetitive practice or a threatened merger is not shown to have a reasonable probability of increased prices or restriction of output, this theory holds, it does not harm consumers and therefore is not a violation of the antitrust laws. This viewpoint began to take hold in the United States in the 1970s and 1980s; since then, federal courts and agencies have viewed antitrust law through the Chicago School lens. The antiquated notion of “trust busting” gave way to the proliferation of vertical arrangements, all judged under the flexible rule of reason standard. The U.S. Supreme Court’s 2007 Leegin decision, overruling a century’s worth of per se scrutiny of resale price maintenance, might be deemed the culmination of the Chicago School’s influence over federal antitrust policy.

When Ms. Khan was appointed Chair of the FTC in 2021, she lost no time directing the agency to challenge vertical arrangements that might previously have attracted little attention. But in two high profile cases, against Meta and Microsoft, the agency failed to persuade district courts to issue preliminary injunctions blocking the proposed mergers. In each case, the court found that the agency had failed to demonstrate a likelihood of succeeding on its claims that the proposed merger would have an anticompetitive effect in the relevant market. Cue the hand-wringing and Monday morning quarterbacking.

But for several reasons we believe that it is far too early to dismiss Ms. Khan’s efforts to remake antitrust law. First, the Meta and Microsoft cases are far from over. Notably, the district court hearing the agency’s case against Meta denied the defendants’ motion to dismiss, finding that the FTC sufficiently and plausibly pleaded its claims that Meta’s acquisition of a virtual reality fitness software developer would foreclose competition. And the agency has appealed to the Ninth Circuit the district court’s denial of a preliminary injunction in the Microsoft matter. In neither case have the merits been definitively adjudicated.

Second, the district court opinions denying the FTC its requested injunctive relief are lengthy and detailed, and not without some small victories for the agency. For example, the Microsoft court adopted – albeit with an important modification – the agency’s preferred test to determine whether a vertical merger is likely to have anticompetitive effects: whether the combined entity will have the ability and incentive to foreclose rivals. To these prongs the court added a third: that competition would probably be substantially lessened as a result of the foreclosure. Even so, this modified test is perhaps better suited to evaluating modern markets than the clunky 61-year-old Brown Shoe test that it is poised to replace.

Third, an important (although not exclusive) basis for the Microsoft court’s ruling that foreclosure was unlikely was Microsoft’s agreement to continue to make the popular Call of Duty program available to its competitors post-merger, and even to expand availability. This agreement, which was likely offered to appease the FTC and other antitrust regulators, actually achieves a notable victory for the FTC. In her law review article Ms. Khan identified, as a possible remedy for foreclosure resulting from vertical mergers, the notion of requiring firms with excess market power to license their property to their competitors, just as owners of an “essential facility” – such as a public utility, common carrier, or telephone pole – have been compelled to do. That such a remedy might be involuntarily imposed on a company such as Microsoft currently seems unimaginable, but in this case Microsoft volunteered for it.

Perhaps the most significant effect that Ms. Khan has had on antitrust enforcement is that she has made it a hot topic of conversation in government offices, boardrooms, and universities. Where the potential consumer harm attributable to vertical integration had all but escaped scrutiny over the past few decades, now it is squarely back in the public eye. Indeed, some supporters of the striking Hollywood writers and actors have called for an antitrust investigation into the vertically integrated streaming industry. Whether or not Ms. Khan’s FTC ultimately succeeds in blocking the proposed Meta and Microsoft mergers, she has already made incremental progress in setting the national agenda.