FTC's Unfair Methods of Competition Enforcement under FTC Act

FTC’s Unfair Methods of Competition Enforcement under FTC Act

As part of the Biden Administration’s ongoing efforts to reinvigorate antitrust enforcement and the promotion of competition, on November 10, 2022, the Federal Trade Commission (FTC) released a new “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act” (the Policy Statement). The Policy Statement significantly expands the scope of what the FTC considers to constitute “unfair methods of competition” prohibited under Section 5 of the Federal Trade Commission Act, 15 USC § 45 (Section 5). In particular, the Policy Statement takes the position that Section 5 reaches methods of competition that are abusive and restrictive, even if the conduct does not otherwise violate the Sherman or Clayton Acts (together, the antitrust laws) and even if the conduct does not actually harm competition or consumers.

Background

Enacted in 1914, Section 5 prohibits, among other things, “unfair methods of competition.” For over a century, the FTC has enforced this broadly worded statute on a case-by-case basis, without any overarching statement of policy as to what the term “unfair methods of competition” meant. This changed in 2015, when a bipartisan group of Commissioners adopted a simple, one-page policy statement (the Prior Statement) to guide the FTC’s enforcement of its “unfair methods of competition” powers under Section 5. First, the Prior Statement said the FTC would be “guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare.” Second, the Prior Statement said the FTC would evaluate conduct “under a framework similar to the rule of reason,” considering whether particular conduct is likely to harm competition by weighing the conduct’s potential benefits against its potential harms. Finally, the Prior Statement said the FTC would be “less likely” to challenge an act or practice under Section 5 on a “standalone” basis if the act or practice could be sufficiently challenged under the antitrust laws.

One of the first policy actions taken by the FTC under Chair Lina Kahn was to rescind the Prior Statement, in July 2021. Chair Khan wrote at the time that the Prior Statement had “abrogate[d] the Commission’s congressionally mandated duty to use its expertise to identify and combat unfair methods of competition even if they do not violate a separate antitrust statute.” Chair Khan added that the FTC would “consider whether to issue new guidance or to propose rules that will further clarify the types of practices that warrant scrutiny” under Section 5. The November 10, 2022 Policy Statement appears to be the culmination of this latest effort .

The Policy Statement

The Policy Statement outlines the “key principles of general applicability” that the FTC will use going forward to assess whether conduct is an actionable “unfair method of competition.”

Methods of Competition

The Policy Statement defines a method of competition as “conduct undertaken by an actor in the marketplace — as opposed to merely a condition of the marketplace, not of the respondent’s making, such as high concentration or barriers to entry.” The conduct must implicate competition in some way, but the relationship can be direct or indirect. For example, the Policy Statement explains that the misuse of regulatory processes to create hurdles to competition (which may relate to licensing, patents, or standard setting) can be a method of competition. On the other hand, general legal violations, such as violations of environmental or tax laws that merely give a business a cost advantage over rivals, are unlikely to be considered a method of competition under Section 5.

Unfairness

The Policy Statement defines “unfair” as conduct that “goes beyond competition on the merits.” Competition on the merits can include, for example, having “superior products or services, superior business acumen, truthful marketing and advertising practices, investment in research and development that leads to innovative outputs, or attracting employees through better employment terms.”

To evaluate whether conduct goes beyond competition on the merits, the Policy Statement outlines two key elements. First, conduct may qualify as “unfair” if it is “coercive, exploitative, collusive, abusive, deceptive, predatory,” “involve[s] the use of economic power of a similar nature,” or is “otherwise restrictive or exclusionary.” Second, the conduct “must tend to negatively affect competitive conditions.” Examples include conduct that “tends to foreclose or odd opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers.”

Under the Policy Statement, the FTC will weigh these two elements on a sliding scale. If the FTC views the conduct as clearly unfair, then the tendency to negatively affect competitive conditions can be smaller or incipient, but the conduct may still warrant Section 5 enforcement. Similarly, even if the indicia of unfairness are unclear, a strong showing of negative effects on competitive conditions may be enough to warrant Section 5 enforcement.

The Policy Statement also states that conduct that is not “facially unfair” may still violate Section 5. In those cases, the FTC may view the size and market power of the party and the purpose of the conduct as more relevant to the FTC’s assessment as to whether the conduct has a tendency to negatively affect competitive conditions.

The Policy Statement also informs that because Section 5 focuses on “incipient” threats to competitive conditions, actual harm may not always be necessary to warrant enforcement. This means the FTC can challenge conduct that has not yet caused any actual harm. According to the Policy Statement, the FTC may focus on whether the conduct has a tendency to generate negative consequences such as price increases, output or quality reductions, innovation reductions, or reducing the likelihood of competition. The Policy Statement is explicit that “the inquiry will not focus on the ‘rule of reason’ inquiries more common in cases under the Sherman Act, but will instead focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions .”

Finally, the Policy Statement acknowledges that affirmative defenses to prima facie Section 5 violations may exist but express skepticism about their applicability. The Policy Statement squarely rejects any attempts to defend allegedly unfair conduct on grounds of a traditional “cost-benefit analysis” that focuses solely on quantifiable metrics. In any event, the Policy Statement says that it is a respondent’s burden to establish that any affirmative defenses are legally cognizable, non-pretextual, narrowly tailored, and that the benefits outweigh the harms both quantitatively and qualitatively.

Examples of Unfair Methods of Competition

The Policy Statement includes 20 non-exhaustive categories of conduct that the FTC might consider an “unfair method of competition” under Section 5. Without repeating the list in full, a few illustrative examples of conduct that the FTC considers “incipient violations” or violate the “spirit” of the antitrust laws are:

  • Invitations to collide;

  • Practices that facilitate tacit coordination;

  • A series of mergers, acquisitions, or joint ventures that, while not on their own meeting the Clayton Act’s standard of “substantially lessening competition,” have an unfair aggregate effect;

  • Loyalty rebates, tying, bundling, or exclusive dealing arrangements that have the tendency to ripen into violations of the Sherman and Clayton Acts due to industry conditions or a company’s position within the industry; and

  • Interlocking directorates not covered by the literal language of the Clayton Act.

The Dissent

FTC Commissioner Christine Wilson voted against the Policy Statement. In doing so, she released a lengthy dissent arguing that the Policy Statement allows the FTC to summarily condemn “any business conduct it finds distasteful” and calls the new standard one of “I know it when I see it.” According to her dissent, the use of adjectives like “coercive,” “exploitative,” and “restrictive” are open to subjective interpretation and lack “established antitrust or economic meanings.” Her dissent also argues that by eschewing the consumer welfare standard for a more open-ended approach that considers interests like those of labor and “inefficient competitors,” the enforcement of Section 5 may run afoul of the principle that the antitrust laws promote “competition, not competitors,” and may become “subject to the whims and political agendas of the sitting Commissioners.”

Key Takeaways

The Policy Statement is a deliberate move to expand the FTC’s enforcement authority to bring a broader range of conduct within the FTC’s crosshairs. Ultimately, courts will decide if the Policy Statement reflects a sound interpretation of the FTC’s authority under Section 5. At this point, however, companies should evaluate their conduct under the prism advocated by the FTC in the Policy Statement. Among other things, companies may consider some of the following steps:

  • Review and expand antitrust training for employees to ensure the training educates employees on the risks in this area;

  • Conduct compliance reviews or audits of high-risk areas of the business for potentially anticompetitive or “unfair” conduct; and

  • Confirm that any applicable standard-setting bodies have rules that protect against fraudulent or inequitable conduct by participants.

Above all, companies should heed the FTC’s guidance that Section 5 does not prohibit bona fide competition on the merits. Therefore, companies should strive to compete through “superior products or services, superior business acumen, truthful marketing and advertising practices, investment in research and development that leads to innovative outputs, or attracting employees through better employment terms.”

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