Notice & Comment

The FTC’s Attempt to Create a Right to Self-Repair or Independent Repair

Yesterday, the FTC announced the first step in its efforts to implement the ambitious antitrust agendas of President Biden and Chair Khan. It will attempt to create a general right to repair any equipment that you own either yourself or through use of an independent service provider (ISP), rather than through the manufacturer of the equipment. Many equipment manufacturers limit or prohibit self-repair or repair by an ISP.

This is not a new issue. It was the subject of an important Supreme Court decision in 1992.[1] A brief summary of that decision and of the facts of the case will explain why I am extremely skeptical that the FTC can succeed.

In 1987, independent providers of service to Xerox copy machines filed a complaint in which they claimed that Xerox was violating the Sherman and Clayton Acts by refusing to allow the sale of replacement parts to ISPs, thereby making it impossible for the ISPs to repair Xerox copiers. Xerox filed a motion for summary judgment. The district judge granted the motion, but a divided panel of the Ninth Circuit reversed.

The Supreme also divided. Three Justices would have upheld the decision to grant the motion for summary judgement based on their view that a manufacturer of a product can never violate antitrust law by precluding ISPs from maintaining and repairing its products. The six-Justice majority reversed the grant of the motion for summary judgment based on its view that the plaintiffs might be able to prevail if they could carry their burden of proof with respect to two issues of fact.

The first issue that the Supreme Court ordered the lower court to address was whether Xerox had market power in the market for repair of its equipment. That is a difficult issue to resolve because it depends on the cross-elasticity of demand between the demand for the equipment and the demand for repairs of the equipment. That, in turn, depends on the extent of the information asymmetries in the equipment market. In the absence of large information asymmetries, an equipment manufacturer can not exercise market power in the repair market because any attempt to increase the prices it charges for repairs would reduce its revenues in the equipment market.

The second issue that the Supreme Court ordered the lower court to address was the claim by Xerox that its decision to become the sole source of repairs for its products would benefit the performance of the market in three plausible ways. Xerox claimed that its new practice would: (1) reduce consumer confusion about whether the poor performance of one of its products was due to a flaw in the product or the poor performance of an ISP, (2) improve its quality control capability by giving it easy access to complete information about the ways in which its products failed to perform well and thus required repairs, and (3) make it easier for some consumers to finance the purchase of one of its products by enabling Xerox to charge an initial price that is less than the full cost of the equipment and then to recover the difference by charging a price above cost for its annual repair service.

On remand, the district court conducted a trial to address those issues of fact. The district judge assigned the jury the task of resolving those issues of fact and of determining the damages due the plaintiffs if the jury decided the merits in favor of the plaintiffs. The jury decided the merits in favor of the plaintiffs and awarded them $73 million in damages. The district judge upheld the jury verdict and issued a permanent injunction that required Xerox to take all of the steps required to allow the ISPs to repair equipment made by Xerox. The Ninth Circuit then upheld the jury verdict for the plaintiffs, upheld the injunction with a minor modification, and ordered the district judge to retry the damage issue because of an error in his instructions to the jury.[2]

The good news for the FTC is the eventual victory of the ISPs. The bad news is the amount of time and effort that was required to resolve a single case involving the right to repair a single product. The plaintiffs filed their complaint in 1987 and obtained a victory in 1997. The FTC could realistically expect to be able to reduce the time required to prevail in a similar case today. The FTC probably would seek only injunctive relief, thereby reducing the length of the trial.

Even if the FTC wins its first case involving this issue in record time, e.g., four years, it would obtain only a precedent that would require it to prove several complicated contested issues of fact to the satisfaction of a district judge, a circuit court, and possibly even the Supreme Court, in every subsequent case in which it alleges that a particular equipment manufacturer is violating the Sherman or  Clayton Acts. The FTC would have little chance of creating the kind of general right to repair that it says that it wants to create through use of this course of action.

The FTC almost certainly plans to use a different path to try to create a general right to repair. It is likely to rely on section five of the FTC Act as the basis to use the notice and comment process to issue a rule that creates a general right to repair. Section five outlaws “unfair methods of competition.” The FTC will rely on the D.C. Circuit’s 1973 opinion that held that it can use notice and comment rulemaking to implement section five.[3]

There are two problems with this approach. First, as I explained in my July 15 post,[4] the Supreme Court is unlikely to agree with the D.C. Circuit precedent. The Supreme Court is likely to hold that the FTC does not have the power to use notice and comment rulemaking to implement section five. Second, even if the Supreme Court upholds that precedent, the Supreme Court is highly unlikely to uphold a rule that creates a general right of repair.

The plaintiffs prevailed in Xerox only because they were successful in proving several issues of fact that were unique to the market at issue in the case. The Xerox majority would have upheld the district court’s decision to grant Xerox’s motion for summary judgment if the plaintiffs had argued that they were entitled to win without proving those factual predicates.

The Supreme Court is highly unlikely to come to a different conclusion just because the FTC relies on section five of the FTC Act instead of the Sherman or Clayton Acts. The Supreme Court is unlikely to uphold a decision that a method of competition is “unfair” in all circumstances after it has held that the same method of competition violates the Sherman and Clayton Acts only when the markets for the products and the repairs have particular characteristics that are unique to the markets at issue.

Richard J. Pierce, Jr. is the Lyle T. Alverson Professor of Law at George Washington University.

[1] Eastman Kodak v. Image Technical Services, 504 U.S. 451 (1992).

[2] Image Technical Services v. Eastman Kodak, 125 F. 3d 1195 (9th Cir. 1997).

[3] National Petroleum Refiners v. FTC, 482 F. 2d 672 (D.C. Cir. 1973).

[4] Richard Pierce, Unsolicited Advice to FTC Chair Khan, Notice & Comment (July 15, 2021).

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