Industry Self-Regulation and Antitrust Enforcement: An Evolving Relationship

The Interdisciplinary Center Herzlia: The Arison School of Business and The Israeli Antitrust Authority Seminar on New Developments in Antitrust Policy, IDC Campus

Herzlia, Israel

Debra A. Valentine, Former General Counsel

* The views expressed here are those of the author, and not necessarily of the Federal Trade Commission or any Commissioner

I. Introduction

Today, I'd like to talk about the relationship between antitrust enforcement and industry self-regulation in the United States. During a century of enforcement experience, the government's approach to industry regulatory efforts has evolved from instinctive aggression to watchful encouragement. This evolution was caused by technological and other changes in the marketplace, alterations in the private sector's approach to cooperative activity, and enforcers' more sophisticated understanding of market dynamics. My remarks will focus first on the reasons for these changes and then turn to a review of current enforcement principles and their application.(1)

II. The Evolution From There To Here

I will not attempt a history of antitrust enforcement cases respecting industry self-regulation. Rather, I will sketch the major currents of change affecting antitrust enforcement doctrine. It's fair to say that early antitrust enforcers were deeply suspicious of any kind of cooperative undertaking among competitors. They agreed with the famous observation made by the economic philosopher Adam Smith over 200 years ago: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices."(2) Indeed, enforcers were inclined to treat trade associations as simply "continuing conspiracies of their members."(3)

This was not necessarily folly on their part. At the turn of the century, there was little occasion for competitors to cooperate, other than for suppressing competition and capturing monopoly rents. Manufacturers' trusts and cartels were in fashion. In contrast, industrial product standardization was uncommon, the International Standards Organization didn't exist, and the service sector of the economy was barely an infant.

But things changed. Technological innovations and the growing integration of the economy across regions spurred recognition among competitors that some kinds of cooperation were important to efficiency and economic success, and beneficial to both sellers and consumers. As these underlying economic trends, at first mere ripples, gathered force through the 20th century, circumstances demanding some form of market cooperation multiplied. It became commonplace to encounter electrical conduit companies debating the wiring standards for building construction, doctors establishing hospital accreditation standards for their peers, and motion picture production companies operating a voluntary rating system for movies. Today, the ripples of yesteryear are tsunamis. In our interconnected, increasingly networked world, computers, telecommunications, and ATM banking systems need compatibility so that consumers can make use of the widest and most convenient array of services. The globalization of economic activity raises new needs for standardization, including security and privacy protocols for Internet transactions.

Meanwhile, the government got over its visceral opposition to industry cooperation. The antitrust bar successfully convinced most of its clients that price fixing and similar, grossly anticompetitive agreements were simply a quick ticket to jail and treble damages. The focus of antitrust counseling for trade associations turned to situations where good economic reasons warranted cooperative conduct. Enforcers recognized that, in an era of expanding economic activity and deregulation, they had neither the resources nor the expertise to fine tune the intricacies of all aspects of all markets. The dialog between the bar and the government, illuminated by increasingly insightful antitrust decisions by our Supreme Court, created a more receptive environment for self-regulatory programs.

Enforcers also reached a far richer understanding of the many benefits that self-regulation offers. Improved industry profitability is typically one result. This is because as self-regulatory efforts cause an industry's goods or services to become more useful, safe, or reliable, consumer demand for the product increases and efficient firms prosper. But a variety of procompetitive public benefits also flow from self-regulation and explain the more benign attitude of enforcers.

Let's examine those benefits. First, many product standards enhance safety. Industry self-regulatory bodies have established thousands of voluntary standards regarding matters such as product design, fire prevention, and ethical standards of practice. By establishing a floor of common quality, such standards not only increase product acceptability and familiarity, but also facilitate the emergence of new markets or the entry of previously unknown products and suppliers. This enhances competition and innovation.

Second, industry regulatory standards can improve the efficiency of industry members. For example, industry standards can reconcile diverse systems or products and thereby permit greater interchangeability of parts or more compatible designs. This is critical in computer, high-tech and network industries. As compatibility increases, so do opportunities to achieve increased economies of scale and scope, lower costs, and higher profit. Compatibility can also facilitate entry by new suppliers and growth for smaller firms, thus enhancing competition. And it offers consumers more choices by allowing them to interconnect or easily substitute rivals' products.

Third, industry regulatory schemes can provide useful information for consumers regarding product qualities, and more information is always good for consumers and competition. Many industry associations have testing or consumer education programs, which are particularly important with respect to new or highly complex products or services. When consumers know what products to trust and how best to use them, they are more satisfied. Such information also facilitates the entry of new products and suppliers and promotes innovation.

Industry self-regulation also brings other public policy or "good government" advantages. To begin with, the private sector has substantial "hands-on" experience, which often enables it to address a problem more capably than could a government agency. For example, an expert professional association is better positioned than governmental enforcers to determine who is qualified to receive certification as an accountant or a financial planner or a language translator.

In addition, an industry's self-regulatory efforts are often quicker, more flexible, less adversarial, and therefore less burdensome, than governmental regulation. This is true both in adopting and in enforcing standards. Private sector self-regulation is thus at times less likely to impede innovation inadvertently and more efficient for society.

Industry self-regulation also allows government to devote its scarce resources to those competition policy matters for which government is best suited. At the same time, industry self-regulation can provide guidance, deterence and enforcement on matters where government cannot, or should not, intervene. For example, some practices that taint or injure an industry's reputation are not illegal -- such as fighting or betting by athletes -- but may be an appropriate target for self regulation.

Finally, through their power to repudiate and reward, industry self regulatory bodies can rapidly achieve a high degree of compliance with their standards of competence, safety or design. In most fields, a good reputation with competitors, vertically related industries, and consumers is vital to success. Few companies want to jeopardize that reputation by failing to abide by measures adopted by their peers. This risk of condemnation by other firms, and thus possible rejection by consumers, can be a potent sanction.

III. Current Enforcement Principles

Antitrust enforcers today take pains to avoid chilling legitimate and thoughtful self-regulation. Typically, government has stepped in where a self-regulatory body's power has been misused to establish an industry cartel, to dampen some key aspect of market competition, or to exclude or discipline firms that pose a competitive threat. Let me discuss two cases in which the U.S. Supreme Court found antitrust liability, because the cases highlight important issues in the antitrust analysis of industry self-regulatory efforts. I'll then review some of the Federal Trade Commission's most recent activities regarding industry self-regulation.

The first case, Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988), involved the abuse of a private standard-setting process. In that case, a manufacturer of plastic electrical conduits, named Indian Head, asked a major standard setting association -- the Fire Protection Association -- to certify its product in the National Electrical Code as a safe and approved electrical wiring product. The standard-setting Association was a private entity. But its National Electrical Code was a well-respected and widely-followed guide that many states had adopted into law. At that time, the only approved electrical conduit was made of steel. The members of the steel industry, as well as manufacturers of steel conduit and their sales representatives, decided to defeat Indian Head's application. They heavily recruited new association members, whose only function was to vote against Indian Head's application. The conspiracy ultimately recruited 230 new members and defeated Indian Head's application by 4 votes, 394 to 390. The Court's opinion centered on whether the association-packing effort was a constitutionally-protected effort to influence government. Rest assured, it was not. But, the Court's discussion of the standard-setting process is instructive for our purposes here on several grounds.

The Court first described the risks and benefits associated with the standard-setting process, and how courts analyze these pros and cons. It observed that private standard-setting associations often have economic incentives to restrain competition. After all, an agreement on a product standard is implicitly an agreement not to manufacture, distribute, or purchase other types of products. But the Court also noted that private associations often promulgate perfectly legitimate safety standards based on objective criteria and likewise employ transparent procedures to prevent members with parochial economic interests from biasing the standard-setting process. Id. at 500-501.

Because of the potential economic benefits of self-regulation, our federal courts judge the conduct of standard-setting organizations under a rule of reason. This detailed, balancing inquiry requires enforcers to demonstrate that the self-regulatory conduct causes more competitive injury than benefit. We avoid using the severe per se rule, which presumes injury to competition and is increasingly reserved for horizontal price-fixing, bid-rigging and other uniformly pernicious agreements among competitors.

Another significant feature of the Allied Tube & Conduit case is its insistence that industry standard-setting activities be conducted in a non-partisan manner. Id. at 507. That an association simply has a set of rules in place is no guarantee of fairness. Rather, an association's rules must contain safeguards that prevent economically-interested parties from skewing the decision-making process.

The FTC's current chairman, Robert Pitofsky, has amplified on the benefits that fair procedures can contribute to the self-regulatory process. First, procedural safeguards signal that the self-regulatory activity is legitimate and that the organization is committed to proper regulatory goals. Second, when industry self-regulators hold hearings, and have written records of the evidence and reasons for their decisions, then members as well as reviewing tribunals know what was decided, and why. Third, requiring valid reasons to be presented for potentially anticompetitive activity before it is adopted encourages the regulatory organization to act in good faith and within its mandate. Fourth, procedures enabling, or even requiring, members to exchange views can lead to fair compromises or resolution of disputes without litigation. Fifth, an organization's record of past self-regulatory efforts may provide evidence that a current decision or motivation is reasonable and procompetitive. Thus, adequate procedures both ensure fairness in an association's internal decision making and help to safeguard industry actions from antitrust challenge.

A second Supreme Court case that sheds light on the antitrust treatment of private sector self-regulatory activities is F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986). In that case, a dentists' Federation adopted a rule prohibiting its member-dentists from giving copies of patient x-rays to insurance companies. The Federation did this even though patients wanted their dentists to provide the x-rays to insurers to facilitate appropriate benefits payments. The FTC brought a case against the Federation and issued a decision finding the conduct unlawful. The Federation sought review in the court of appeals, which overturned the Commission's decision. The Commission then won on review by the Supreme Court.

In its opinion, the Supreme Court recognized that the dentists' joint refusal to provide the insurance companies with the x-rays resembled a group boycott, and that group boycotts traditionally have been viewed as per se illegal. But the Supreme Court also recognized that this case did not present the typical boycott situation -- it did not involve a group of firms using their collective market power to injure rivals by pressuring common customers or suppliers to refrain from dealing with those rivals. Consequently, the Court agreed with the FTC's approach and opted to review the facts under the rule of reason.

The Court then identified three questions that are relevant in assessing whether self-regulation is likely to cause competitive injury. First, do members of the association have parallel or divergent economic interests? In Indiana Federation of Dentists, all association members were dentists, and shared the same economic interests -- a possible warning signal. In contrast, Allied Tube might appear different, because the members of the standard-setting association came from many industries and thus would appear to have quite divergent interests. Unfortunately, the conspiring steel producers, steel conduit manufacturers, and conduit distributors who packed the meeting had a common and very parochial economic interest in excluding plastic conduit.

Second, are the standards mandatory or voluntary? In the Indiana Dentist case the Federation's x-ray rule was mandatory. In Allied Tube, the denial of organizational approval for plastic conduit theoretically had no coercive effect since the National Electrical Code is simply a set of guidelines. But, as a practical matter, the Association's decision not to approve plastic electrical conduit was dispositive because many state laws incorporated that Code. Moreover, denying approval effectively excluded the product from the market -- no building contractor would use a product that had not been determined to be safe and underwriters wouldn't insure structures that do not conform to the Electrical Code.

A private sector self-regulatory body that promulgates mandatory rules may well cause an anticompetitive impact. By contrast, when an organization promulgates voluntary guidelines, that members do not agree to implement, there is little risk of competitive injury or governmental challenge. This is true even if an organization publicly identifies the members who do not comply with the guidelines. The organization may properly supply the public with valuable and accurate information that may otherwise be unavailable to them. Any injury to noncomplying members would flow only from the preferences of informed consumers -- not the organization's disclosure.

Third, does the organization's membership have collective market power? For example, if an organization's members constitute only a small percentage of the market's participants, or the association is just one of several rival professional bodies, the organization's decisions are unlikely to injure competition. But this analysis must be done carefully. Although the Indiana Federation had a small proportion of all dentists in the state, its members were concentrated in three communities where they dominated the practice of dentistry. Similarly, although the Fire Protection Association in Allied Tube had a diffuse, membership, the critical role of the National Electrical Code gave the Association market power.

The Court also asked when antitrust law should tolerate a competitive restraint embodied in an association's regulatory decision or standard because it provides important social benefits. Courts have forcefully rejected attempts to proffer pretextual or implausible benefits to excuse anticompetitive restrictions. For example, what if a society of engineers defended restrictions on price competition by asserting such competition would cause lower prices and lower profits, and thereby heightened incentives to use cheaper construction methods that would impair the safety of buildings?(4) The Supreme Court has rejected this argument, characterizing it as nothing less than a frontal assault on our founding antitrust statute, the Sherman Act. Id. at 695. But as one of our great antitrust scholars has noted, the Supreme Court probably would have worded its opinion somewhat differently if it believed that competitive bidding would cause buildings to collapse.(5)

In a similar fashion, the Indiana dentists argued that their restrictions on giving insurers x-rays were designed to assure adequate dental procedures. The Court not surprisingly concluded that the Indiana dentists had improperly substituted their view of what was best for consumers for the preferences of the consumers themselves. Such an agreement violates antitrust's rule of reason by limiting consumer choice and impeding the ordinary give and take of the market place. IFD at 459.

At bottom, in both cases the Supreme Court was appropriately skeptical of a private organization's effort to substitute its determination of proper social policy for Congress's choice of competition as the guiding force in our economy. It would be an error, however, to read these cases too aggressively. What is needed is careful examination of the association's restraint. An argument that sharing x-rays with insurance companies will force dentists to provide low cost, and therefore low quality, dental service simply doesn't make sense. Low cost dental service is not necessarily incompetent dental service. Further, the dentists' ban on sharing patient x-rays was unnecessarily indirect. It purported to ensure good professional practice by the roundabout method of interfering with the critical price -- and output -- setting functions of the competitive market. The dentists would have had a far greater chance of avoiding antitrust challenge if their effort to promote high quality practice had been directed at matters within their professional expertise, such as the specification of particular activities that constituted good or bad dental practice.

In sum, prevailing antitrust doctrine is not antagonistic toward self-regulatory efforts, in and of themselves. The Supreme Court has expressly confirmed the substantial value of such activities. At the same time, the Court has recognized the possibility that self-regulatory efforts can be abused. The role of government enforcers, therefore, is not to interdict legitimate industry self-regulation but to ensure that such efforts are consistent with the operation of competitive markets.

V. Agency Enforcement

So what have we done? The FTC is quite active in the standard-setting and self-regulation arenas. Much of our effort has been to encourage and assist private sector self-regulation, but where we find an antitrust violation, we challenge it. Dell Computers, Inc., Dkt. C-3658 (consent order, May 20, 1996) (Comm'r Azcuenaga dissenting), provides an interesting example of how a member of a standard-setting association, by abusing neutral procedures, can gain a special competitive advantage for itself. In that case, is a standard-setting association for the personal computer industry was trying to develop a non-proprietary standard for a device called the "VL-bus." The bus is a mechanism for transferring instructions between the computer's central processing unit and its peripherals. Dell's representative, like other members of the computer association, filed a form indicating that he knew of no patents or copyrights that the VL-bus design would violate. In part for this reason, the association selected the VL-bus design standard over other options. Once that standard became well-accepted and over 1.4 million computers incorporating the standard were sold, Dell asserted that the bus standard infringed a Dell patent. The Commission concluded that Dell's conduct would give it market power regarding the VL-bus design and permit it to raise rivals' costs. The Commission obtained a settlement with Dell that prohibits it from enforcing its patent rights against computer manufacturers using the VL-bus.

The FTC also advocates on behalf of sound self-regulatory efforts. Just two months ago, Commission staff commented on a proposal to privatize the Internet Domain Name Registration System.(6) The National Science Foundation holds the current contract for registering domain names, but the contract is about to expire. Under the privatization proposal, firms would compete to register and administer domain names. Those firms, however, could, along with other interested parties, create a not-for-profit association that would operate much like an industry standard-setting body by providing common ancillary technical services.

Staff observed that some cooperation is essential if the Internet is to work. It noted that creating a not-for-profit association to coordinate private conduct in providing technical services could be especially useful in maintaining a stable system of addresses. The staff suggested that cooperative efforts are likely to yield efficient and nondiscriminatory technological standards if (1) overall, there are net benefits from standardization; (2) each party's benefits from promoting standardization exceed its costs; and (3) no party has a vested interest in any particular standard. Although government could oversee such coordinated conduct, industry participants could probably bring more expertise, speed, and flexibility to such tasks. Staff therefore endorsed the proposal, particularly given its emphasis on the adoption of proper safeguards by the association, such as fair and open procedures for making decisions, requirements for recording the bases of decisions, and a mandate for including diverse economic interests on the association's board.

Turning to another type of Commission activity, we also cooperate with private self-regulatory bodies to help them avoid the antitrust pitfalls of self-regulation. For example, last year we were in the process of preparing a report to Congress regarding "look-up" services, that is, services that scour the Internet and proprietary computer networks and aggregate for resale all available information on individuals. That information includes not only a person's address and telephone number but social security number, date of birth, unlisted telephone numbers and other non-public data. At the same time, a group of industry members known as the Individual Reference Services Group ("ISRG") announced plans to deal with the issues posed by such services through industry self-regulation. Look-up services confer benefits on legitimate users -- their information helps banks and creditors prevent fraud, helps enforcers track down law violators and witnesses and helps public interest groups search for missing children. But in the wrong hands, personal identifying information can infringe privacy and be used to commit fraud such as identity theft.

The Commission worked with the ISRG to develop an effective and fair industry program. All of the ISRG's members agreed to follow a set of "Principles," which represent an important attempt to regulate access to identifying information obtained from non-public sources. The principles are enforced by an industry-operated mechanism, and a neutral third party conducts annual compliance reviews of all member firms. Signatories to the Principles are prohibited from selling information to firms whose conduct is inconsistent with those standards.(7) In addition, the ISRG agreed to revisit Commission concerns relating to consumers' access to information about themselves that the Principles did not appear to solve. The agreement thus contemplates an ongoing cooperative relationship between the ISRG group and the FTC. While this industry self-regulation may be the optional way to protect privacy without impairing socially beneficial uses of identifying information, Congress is already contemplating legislation -- indeed, much broader privacy regulation -- if it doesn't work.

Similarly, last year the Direct Marketing Association ("DMA") asked FTC staff to review a proposal requiring each of DMA's members to honor consumers' requests not to be included on members' mail or telephone solicitation lists. The DMA proposal also required each member to inform consumers of that firm's practices regarding the sale of names and information about customers and to respect consumers' requests not to transfer such information. Because the program previously had been optional, and the DMA wanted to make it mandatory for members, the DMA asked the FTC staff for an opinion letter as to whether such a collective restriction would violate the antitrust laws. Our response was no. We observed that while restrictions that competitors agree to impose on solicitations can be anticompetitive, the restrictions in question would be imposed at the consumer's request. Consequently, the restrictions appeared unlikely to be anticompetitive, and might even be procompetitive, to the extent that consumers would get more information about individual DMA members' use of personal data. Moreover, consumers who favored the DMA disclosure and protection policies would be more likely to make purchases from DMA members. In essence, while the proposed requirements would be mandatory, they honored the principle of consumer sovereignty.

I hope I have given you some guidance for navigating the difficult yet important waters of industry self-regulation. As economic activity expands globally and the powers and resources of governments contract, self-regulation will be an increasingly important means of improving the operation of our markets. As enforcers' economic understanding becomes more sophisticated, we are increasing able to provide useful guidance to industry groups. And as firms become more sensitive to which cooperative activities are useful and which are exclusionary and anticompetitive, I anticipate that we will be allowing a wide-variety of self-regulatory endeavors.


1. Of course, the views I express today are entirely my own and do not necessarily reflect those of the Federal Trade Commission or any individual Commissioners.


3. Cf. 7 PHILIP E. AREEDA, ANTITRUST LAW ¶ 1477 (1986).

4. National Society of Professional Engineers v. United States, 435 U.S. 679 (1978).

5. P. AREEDA, 7 ANTITRUST LAW 381-383 (1986).

6. Comment of the Staffs of the Bureaus of Economics and Competition of the Federal Trade Commission, March 23, 1998 at 10.

7. Because the signatories include the three major credit reporting services, which collect the vast majority of personal identifying information in this country, this prohibition is likely to be highly effective.