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The FTC’s Promotion of Competition in Aftermarkets for Repairs Gets a Boost From Biden’s Executive Order on Antitrust Enforcement

Posted  July 27, 2021
By James J. Kovacs, Yo W. Shiina

President Biden’s Executive Order on Promoting Competition in the American Economy, which seeks to invigorate antitrust enforcement, already appears to bearing fruit in the fields of the FTC.

Coming on the heels of President Biden’s July 9, 2012, Executive Order, the FTC voted unanimously on July 21, 2021, to adopt the Policy Statement of the Federal Trade Commission on Repair Restrictions Imposed by Manufacturers and Sellers. The FTC stated that, through its workshop on “Nixing the Fix” and comments by various stakeholders, it “uncovered evidence that manufacturers and sellers may, without reasonable justification, be restricting competition for repair services in numerous ways….” The FTC also expressed concern that the anticompetitive effects of these restrictions are “borne more heavily by underserved communities, including communities of color and lower-income Americans.”

To address these abuses, the FTC stated that it “has determined that it will devote more enforcement resources to combat these practices.” The FTC’s focus on such abuses seems to be exactly what President Biden was seeking in his Executive Order, which instructed the FTC “to exercise the FTC’s statutory authority” to address “unfair anticompetitive restrictions on third-party repair or self-repair of items.” The FTC’s focus is likely to include investigations into unlawful repair restrictions under relevant statutes such as Section 5 of the FTC Act and the Magnuson-Moss Warranty Act (“MMWA”).

As the FTC unanimously voted to adopt this statement, both Commissioners Phillips and Wilson noted the bipartisan support for this initiative, although Commissioner Wilson cautioned against “blanket condemnation” against design choices, noting that it is on the Congress to consider “whether making a design change that excludes competitors or otherwise undermines competition should be a violation of Section 2.”

The FTC’s Findings in the “Nixing the Fix” Report

The FTC issued its “Nixing the Fix” report in May 2021 in response to Congress’s directive that the FTC report on anticompetitive practices related to repair markets.  In that report, the FTC highlights a litany of anticompetitive and abusive Original Equipment Manufacturer (“OEM”) restrictions on aftermarket repairs relating to:

  • Physical restrictions, e.g., use of glue or welding to seal component parts within a device;
  • Unavailability of parts, manuals, and diagnostic software/tools;
  • Designs that make independent repairs less safe, e.g., lithium ion cells that come in the same physical dimension and different internal chemistry;
  • Steering consumers to OEMs’ repair networks using telematics systems;
  • Patent rights and trademarks;
  • Disparagement of non-OEM and independent repair services;
  • Software locks, digital rights management, and technological protection measures, e.g. “VIN (vehicle identification number) burning” in automobiles.

The FTC’s analysis of manufacturers’ common explanations repair restrictions found them wanting:

  • Regarding protection of intellectual property, the FTC commented that “misuses of intellectual property rights may create barriers to independent repairs, and thereby harm competition.” Although the FTC stated that “[a] full discussion of the interplay between intellectual property and repair is beyond the scope of this report,” it did focus the issue by noting that “while it is clear that manufacturers’ assertion of intellectual property rights can impede repairs by individuals and independent repair shops, in many instances intellectual property rights do not appear to present an insurmountable obstacle to repair.”
  • Regarding manufacturers’ argument that aftermarket repair restrictions protect consumers and repair workers, the FTC noted that (i) safety concerns do not typically justify restricting repairs to authorized repair networks; (ii) the “safety” justification is difficult to square in light of how independent repair services provide safe repairs in automobile industry; and (iii) OEMs can design products to make them safer to repair, such as by labeling the internal chemistry of lithium ion batteries (which can vary dramatically in their chemical compositions).
  • Regarding OEMs’ assertion that repair restrictions protect consumers from cybersecurity risks, such as inadvertent compromise on the embedded hardware security technology, the FTC found that the record contained no empirical evidence to support that justification.
  • Regarding OEMs’ assertion that improper repair by unauthorized repair services would expose the original manufacturer to reputational risks and the expense of defending lawsuits, the FTC again noted that manufacturers provided no empirical evidence to support their concerns.
  • Regarding OEMs’ assertion that consumer demand for lighter and durable devices drives manufacturers to choose design choices that affected their products’ repairability, the FTC noted that the arguments made by manufacturers as well as right-to-repair advocates were entirely anecdotal and unsupported. The FTC also noted, however, that third-party research suggests that consumers may not be aware of repairability in the products they purchase, which reinforces manufacturers’ ability to exercise market power in aftermarkets.
  • Regarding OEMs’ assertion that authorized repair facilities provide superior service, the FTC found no record establishing that repairs conducted by independent repair shops would be inferior.

The FTC also examined the right-to-repair advocates’ argument against repair restrictions and found that: (1) independent repair services provide timely services in emergencies and in areas where authorized repair facilities are sparse; (2) none of the comments or empirical research submitted to the FTC rebuts the right-to-repair advocates’ argument that manufacturers’  restrictions increase prices for consumers; and (3) increasing repair options is consistent with the  environmental responsibilities identified by the EPA.

The FTC’s Authority to Challenge Aftermarket Repair Restrictions

The FTC can pursue reforms in repair aftermarkets though its statutory investigative powers, as well as by enforcing the antitrust and certain consumer protection laws.  The Federal Trade Commission Act confers the Commission with investigative powers, including broad authority to gather and compile information concerning businesses except for banks, saving and loan institutions (Section 6), power to issue subpoenas (Section 9), and power to issue civil investigative demands (Section 20).

The FTC is also empowered to challenge aftermarket repair restrictions under specific consumer protection statues such as the MMWA.  The MMWA authorizes the FTC to regulate written warranties, including establishing disclosure standards and consumer remedies. Section 102(c) of the MMWA specifically prohibits an original equipment manufacturer (OEM) to limit its provision of warranty to articles or services provided by the OEM’s own brand. Section 5 of the FTC Act confers even broader authority, as it empowers and directs the Commission to prevent “unfair methods of competition.” Although, until recently, the FTC’s enforcement powers under Section 5 were deemed to replicate Section 1 and 2 of the Sherman Act, on July 1, 2021, the FTC issued a policy statement withdrawing its 2015 statement on Section 5 enforcement principles, and announced its intent to consider redefining the contour of its Section 5 enforcement policy.

Although the Commission’s vote on withdrawal of the 2015 statement showed a stark partisan divide (Democratic Commissioners—Chairperson Khan, Commissioners Slaughterhouse and Chopra—voting “yes,” and Republican Commissioners Wilson and Philip voting “no”), the FTC’s vote on its repair restriction policy was unanimous. The Commission’s bipartisan and unanimous vote to adopt the Policy Statement on Repair Restrictions, following President Biden’s instructions in the Executive Order, is expected to promote and expand competition in aftermarkets for repairs by making “it easier and cheaper to repair items you own by limiting manufacturers from barring self-repairs or third-party repairs of their products.

Edited by Gary J. Malone

Tagged in: Antitrust Enforcement,

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