The Biden Executive Order’s Restraint on Freedom of Contract: Regulation by Anecdote May Lead to Unintended Consequences

By Kristian Stout
July 20, 2021

“None of this is to say that there are no problems that need fixing…. But broad regulatory mandates enacted without empirical evidence of harm are nearly assured of generating undesirable unintended consequences.”

Biden Executive Order - https://depositphotos.com/31248541/stock-photo-opinion-business-concept.htmlCapping months of anticipation, President Joe Biden on July 9 unveiled his Executive Order on Promoting Competition in the American Economy, which he argues will “lower prices for families, increase wages for workers, and promote innovation and even faster economic growth.” To achieve these lofty goals, the order prescribes regulatory interventions that interfere with property and contract rights in industry after industry.

Undergirding the order is the premise that “competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income, and wealth inequality.” The White House offers only a handful of anecdotes to justify this sweeping conclusion, which remains highly disputed. In fact, few sectors of the U.S. economy are especially concentrated, and many markets that have become concentrated at the national level have become less concentrated at the local level, as national chains open up in more areas.

With such an inauspicious foundation, it is perhaps unsurprising that the order’s directives are likewise attenuated from empirical evidence. This is not to suggest that competition is an inappropriate subject of inquiry for the administration, or that all firms in the market segments targeted by the order are completely blameless. But it is noteworthy, at first blush, how little effort the order expends in seeking to substantiate the existence of, and quantify the magnitude of, consumer harms before directing agencies to bring the weight of the federal government down upon private firms (and by extension, their customers).

Right to Repair

One notable example is the order’s recommendation that the Federal Trade Commission (FTC) should exercise its statutory rulemaking authority to address “unfair anticompetitive restrictions on third-party repair or self-repair of items.” As the FTC’s recent report on the subject demonstrates, there is a vast amount of territory covered by the so-called “right to repair.” On one end of the spectrum, there are pure antitrust concerns—tying access to a product to the purchase of service contracts, for example. Somewhere in the middle are calls for firms to be required to make available repair parts and documentation to purchasers and third-party repair companies on the same terms offered to “official” repair services. And on the far end of the spectrum are allegations that the enforcement of patents and copyrights are anticompetitive when they stand in the way of third-party repair services.

The order’s directives are oriented toward that latter end of the spectrum, infused with a generalized suspicion that even design decisions intended to make a product more attractive or useful to consumers may be surreptitiously motivated by the goal of making it more difficult for third parties to repair.

Singled out for explicit attention in the order are cases where farmers are unable to repair their equipment. Typically, this would arise from a situation where a manufacturer like John Deere makes use of technological protection measures (TPMs) authorized under Section 1201 of the Digital Millennium Copyright Act (DMCA) in order to restrict access to a particular piece of machinery’s underlying system software. But, as the FTC itself noted in its report, “the assertion of IP rights does not appear to be a significant impediment to independent repair.”

Leaving aside whether Section 1201 strikes the proper balance between protecting property rights and protecting a public interest in access, it’s indisputably the case that a complicated set of business practices and contractual provisions have grown up around the law. Equating firms seeking enforcement of the law barring the circumvention of copyright-protection systems with their engaging in anticompetitive restrictions just completely fails to wrestle with this reality.

For example, the FTC report notes that Microsoft relies on Section 1201 to create controls that protect the copyrights not just in underlying system software, but also in the titles of games played on their Xbox consoles. Allowing third-party repair shops to bypass these controls as of right would open up a massive vector for compromise and piracy.

Beyond consoles, consider other equipment manufacturers that deal with sensitive data. Apple and other handset makers, firms that make networking equipment and auto manufacturers all write software that controls critical systems, and undoubtedly rely on Section 1201 to protect access to parts of those systems. Compromising those firms’ right to control access to their copyrighted code could provide a vector for bad actors.

Could Broadband and Big Tech Interventions Backfire?

Biden’s order reveals a similar penchant to interfere with contract in other areas, as well. On the relatively mild side, it recommends the Federal Communications Commission (FCC) revive the “broadband nutrition labels” idea floated during the Obama administration. But on the more extreme side, it also asks that the FCC interfere with early-termination fees in broadband consumer contracts and promulgate common carrier regulations for broadband providers under Title II of the Telecommunications Act. U.S. broadband deployment can indeed be improved, particularly in persistently hard-to-reach areas, but by and large, broadband competition is healthy and consumers are overwhelmingly well-served. Interfering with private contracts and moving toward onerous regulatory oversight and rate regulation would do nothing to benefit consumers, while simultaneously placing more impediments in the way of deployment.

The order also sets its sights on Big Tech broadly, with a particular focus on the industry’s mergers and acquisitions and what it deems to be “unfair data collection and surveillance practices.”

So-called “killer acquisitions”—purchases of smaller firms that present only a nascent or potential competitive threat to the purchasing firm—are widely misunderstood.  Research suggests such acquisitions are relatively rare, but where they do occur,  there are positive and neutral effects that must be weighed against any potential negatives. For example, it may be more efficient for a larger entity to manufacture and distribute products developed by the smaller entity, rather than develop them through its own R&D pipeline. Moreover, acquisition can be just as much of an incentive to innovate by smaller firms as is the incentive offered by an initial public offering. These benefits have to be considered as well as the potential harms from these kinds of mergers — but the EO acts without any evidence like this.

And, finally, although it is popular to fear so-called “surveillance capitalism” and Big Tech’s alleged encroachment on personal data, interventions in this area need to be undertaken with particular caution. Consumers’ willingness to trade attention and data for access to goods and services provides firms with the opportunity to try innovative business models that are able to reach consumers across a wide range of incomes. Regulatory intervention that deems data collection an “unfair” practice could easily backfire, by, for example, pushing marginal firms out of business, while entrenching incumbents and shifting their incentives toward depending on explicit user fees. That, in turn, could end up pushing marginal users out of the market.

Regulating by Anecdote

Again, none of this is to say that there are no problems that need fixing. If consumers truly are being locked into anticompetitive tying arrangements, the FTC should be encouraged to intervene. If evidence is produced that broadband networks are actually engaging in particular anticompetitive acts, the FCC should seek remedies that focus on that behavior. But broad regulatory mandates enacted without empirical evidence of harm are nearly assured of generating undesirable unintended consequences.

It is always possible to curate anecdotes that highlight distasteful market behavior, but we should not legislate or regulate by anecdote. It is the net effect of a particular firm’s behavior that regulators should be concerned with, not generalized suspicions. If particular harms can be identified, they should be ameliorated. If society is, on the whole, made better off by sleeker designs, sturdier builds, or more data-driven apps—even if that makes it harder for smaller marginal competitors to operate—then that should not be a concern for the government.

Image Source: Deposit Photos
Author: tashatuvango
Image ID: 31248541 

The Author

Kristian Stout

Kristian Stout is ICLE’s Director of Innovation Policy and an expert in intellectual property, antitrust, telecommunications, and Internet governance. Kristian has been a Fellow at the Internet Law & Policy Foundry, as well as the Eagleton Institute of Politics. Before practicing law, Kristian worked as a technology entrepreneur and a lecturer in the Computer Science Department at Rutgers University. Kristian currently serves on the board of the New Jersey Leadership Program, and is the Chair of the Asset Forfeiture Working Group for the NJ State Advisory Committee to the United States Commisison on Civil Rights. He has previously served on the Broadband Deployment Advisory Committee for the Federal Communications Commission. Kristian graduated magna cum laude from the Rutgers University School of law, and served on the editorial board of the Rutgers Journal of Law and Public Policy.

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Discuss this

There are currently 3 Comments comments.

  1. Anon July 20, 2021 2:27 pm

    I will entirely disagree with the attempted broad strokes of, “Equating firms seeking enforcement of the law barring the circumvention of copyright-protection systems with their engaging in anticompetitive restrictions just completely fails to wrestle with this reality.

    The broad statement is equivalent to simply stating the any current reality cannot be disturbed.

    When it comes to the digital domains, and especially forced (by law) constraints that interfere at the front end of any activity – of which that activity may in and of itself be a Fair Use – then you have a ‘reality’ of constraint imposed FOR the sake of ‘old school’ business models that themselves simply do not reflect the ‘reality’ of digital goods.

    If you wanted to pick one area to misfire that would have been the Right to Repair area.

  2. Pro Say July 20, 2021 2:41 pm

    “we should not legislate or regulate by anecdote”

    “But . . . but . . . but . . . anecdotes are just soooooo much quicker and easier to base important decisions on! Evidence gathering? Ha! Takes too long and is too much trouble! The Repubs are taking back the Senate in 2022 . . . and I’m only here for four years you know! Got to shoot first and ask questions later (if at all)!”

    — Sleepy Joe

  3. PatentBoy July 20, 2021 7:55 pm

    For brevity (of the narrative), the administration will hereby refer to them as “trolls.”
    (I feel like I’ve seen this movie before,..but where? ?)