Deceptive Advertising? The FTC Has Trouble Backing Up Its Claims

On Friday, the Federal Trade Commission’s (FTC’s) case against Amazon reached another milestone as Amazon filed its motion to dismiss (MTD). Straightforwardly, Amazon pointed out that the FTC failed to state a valid claim, mainly because it provided no evidence of the harm to competition and consumers it alleges took place. Fortunately for small companies that rely on the online marketplace model—like ACT | The App Association members—it will be difficult for Judge John Chun to ignore the glaring weaknesses in the FTC’s claims.Gr

Low-Price Guarantee. In its complaint, the FTC alleges that Amazon’s practice of requiring sellers, in return for being featured—to guarantee that the lowest price of the item at issue is offered through Amazon rather than a competing platform—is anticompetitive. Unfortunately for the FTC, it was unable to offer evidence that the practice is anticompetitive. In order to survive an MTD, evidence must at least be described in a complaint. What the FTC provides falls short of being evidence of anticompetitive effects because it only references anecdotal experiences of “one” or “some sellers,” and declines to even describe the type of products affected, let alone the magnitude or character of the alleged impacts on consumers that may result from those experiences. Not only that, but Amazon’s practice is a common one in retail and its competitors employ it too. Therefore, a heavy burden rests on the FTC to show that a low-price guarantee leads to higher prices. There is no reason to believe it has substantive evidence that its claim is true.

Fulfillment Services. Amazon asks sellers with a Prime badge to deliver items to buyers within two days. Amazon’s Fulfillment by Amazon (FBA) service meets those requirements, leading most sellers to use FBA instead of rival fulfillment services. On this issue, the FTC has two problems. The first is that it has to rely on a clumsy mischaracterization of Amazon’s policy—namely, that Amazon reserves the Prime badge exclusively for sellers that use FBA. This is not true, as Amazon allows Prime sellers to fulfill their own orders, including with third-party fulfillment services. Second, the FTC provided no evidence at all to plausibly support the claim that providing FBA for Prime sellers—and asking them to meet a two-day shipping window—harms competition and consumers. If the FTC described the policy accurately in its complaint, it might have to acknowledge that even though a two-day guarantee is tough to meet, the fact that FBA can is a good thing for Prime members. Viewed in a more accurate light, it is not hard to see why the FTC was unable to uncover any evidence of FBA’s and the Prime policies’ anticompetitive effects. It also illustrates how challenging the practice in court amounts to not much more than trying to prohibit something that brings consumers to the marketplace. It shouldn’t need to be said, but the introduction of a new product or service that is measurably better than those offered by rivals is procompetitive. So, the fact that not many fulfillment services are able to meet the two-day guarantee as well as FBA is also not inherently a competition concern.

What’s the Remedy? If you’re wondering how the FTC wants the court to address the conduct at issue, you’re mainly out of luck. The complaint itself declines to go into any detail on what it wants the court to do if Amazon is found liable, other than to suggest that the court consider “structural” remedies. This is a veiled reference to breaking up Amazon into component parts, an outcome that would certainly be unpopular with consumers by making things more expensive and less efficient. To be fair, one of the reasons governments decline to plan economies is that public servants are not in the best position to design products and services. However, where antitrust intervention is warranted, the enforcer or plaintiff must help the court chart a better path than the one that exists prior to the lawsuit. Here again, it will be hard for Judge Chun to ignore the FTC’s inability to come up with something better than what Amazon has.

The FTC has an important mission. Namely, the job Congress gave it is to protect consumers from unfair or deceptive acts or practices and from unfair methods of competition. So, when it pursues cases that cannot be traced to these purposes, it does all of us as consumers a disservice. The problem is amplified when it does so in search of an outcome that would hurt small businesses like App Association members. But a broader and longer-lasting issue is the precedent the FTC sets when it files claims without relevant evidence and without a proposed remedy. This is the kind of enforcement philosophy that discourages procompetitive business practices, including the offering of valuable online marketplace services that small businesses rely on disproportionately. For the sake of App Association members and consumers, we hope Judge Chun puts this lawsuit out of its misery at an early stage. Allowing it to reach further steps in the process, such as a trial, would require the parties to debate the evidence—of which there is too little to discuss much less debate.