Commissioner Wright Calls The FTC’s Section 5 Record ‘Uninspiring If Not Bleak’ – Has The Time Finally Arrived For A Meaningful Standard?

by Pepper Hamilton LLP

For years Section 5 of the Federal Trade Commission (FTC) Act has been used to address a wide range of conduct deemed to be unfair methods of competition. Attention has once again turned to the uncertain reach of Section 5 because of not only the FTC’s recent Section 5 enforcement decisions, but also Commissioner Joshua Wright (R)’s Proposed Policy Statement Regarding Unfair Methods of Competition, issued on June 19.

Some examples of conduct to which the FTC has applied Section 5 include standard setting, distribution policies, invitations to collude, and seemingly everything in between. Indeed, in April, the FTC brought a Section 5 challenge to Bosley’s competitively sensitive information exchange with Hair Club. There, the information exchanged by the companies’ CEOs included details about future product offerings, surgical hair transplantation price floors and discounts, plans for business expansion and contraction, and current business operations and performance.

This hodgepodge of enforcement has led people to ponder what the standard for Section 5 enforcement is – is it "I know it when I see it" or is it more nuanced? Perhaps, the FTC intends to apply it to trade restraints or conduct which, under current antitrust case law, would not be considered unlawful. Commissioner Wright’s recent proposal, along with statements by the other current commissioners provide glimmers of hope that something akin to a standard will emerge.

The History: 1980 Statement

Section 5 provides the FTC with administrative powers outside of the Clayton and Sherman Acts to combat anticompetitive behavior. Although Section 5 was adopted nearly a century ago, woefully little has been written setting forth a standard for its application. The last official statement of the FTC was a letter to the Senate over 30 years ago that mainly pertained to the consumer protection side of Section 5. The letter glossed over the antitrust implications in a footnote, which stated that the FTC "looks to the purposes, policies, and spirit of the other antitrust laws and the FTC Act ... and is guided by the extensive legislative histories of those statutes and a considerable body of antitrust case law." Despite the 1980 Statement’s emphasis on consumer protection, the FTC’s recent and unpredictable use of Section 5 has caused considerable debate about what acts or practices constitute an unfair method of competition.

Frustration in Play: The Lessons of Google

In January the FTC concluded two separate investigations concerning Google. In the first matter, dealing with Google’s search engine, the FTC decided not to bring an enforcement action. There the FTC investigated whether changes to Google’s algorithms were designed to exclude competitors in the vertical search space. Vertical search engines compile data in a narrow subspace of the Internet, such as travel. The FTC reviewed the way in which it worked and the rationale behind Google’s implementation of the algorithm changes. Even though Google’s changes sometimes had the effect of harming individual competitors, the commissioners voted unanimously not to challenge Google’s conduct because they could be plausibly justified as innovations that improved Google’s product and the experience of its users.

While there was no enforcement action, Google agreed to stop certain practices based on strong concerns from the FTC. These practices include "scraping" content from some competing sites like Yelp, passing it off as their own, and threatening to delist companies who complained of the practice. As a result of the FTC investigation, Google promised to allow companies to "opt-out" of having their information displayed on Google’s vertical pages, while still appearing in its traditional horizontal search engine. Google also agreed to stop a practice of placing certain restrictions on companies advertising on both Google and a competing search engine, such as Bing.

In a second investigation of Google, however, the FTC did challenge the licensing and litigation practices of Google’s subsidiary – Motorola Mobility. The FTC determined that Motorola Mobility violated Section 5 by breaching its commitments to standard-setting organizations to license its standard essential patents (SEPs) on fair, reasonable, and non-discriminatory (FRAND) terms. Specifically, Motorola Mobility violated its FRAND commitments by filing litigation in the courts and the International Trade Commission (ITC), seeking to enjoin and exclude willing licensees of its SEPs. Certain standardization improves innovation and consumer choice in particular areas, such as smartphones, by allowing innovators to rely on the availability of licenses of SEPs on FRAND terms in order to bring new technologies or products to market. The FTC was concerned that if the requested injunctions were granted, innovators would be reluctant to make standard-compliant products and could remove certain choices from the marketplace. The FTC noted that the enforcement will assist standard-setting procedures.

Notably, two commissioners who are still at the FTC (now-Chairwoman Edith Ramirez (D) and Maureen Ohlhausen (R)) dissented from the FTC’s use of its unfair acts or practices authority. Chairwoman Ramirez stated that the FTC exceeded its authority as defined in the 1980 Statement. Commissioner Wright, who joined the FTC after the Google decision, recently called using Section 5 outside of the scope of an empirical foundation a "sin" and, accordingly, would have likely voted against enforcement. With Commissioner Wright, there would have likely been three of the five commissioners voting against enforcement under Section 5; had Google’s investigation come to the FTC only a few months later, there would likely have been no enforcement.

The best evidence of the lack of clarity related to the scope of Section 5 is perhaps found in the FTC’s own Statement issued in connection with the Motorola Mobility decision. There, the FTC wrote "we respectfully disagree with the view of Commissioners Rosch and Ohlhausen that the conduct we challenge here, and the similar acts we challenged in Bosch, represent an undisciplined or unwarranted application of our unfair methods of competition authority." The struggle among the commissioners themselves has done little to provide certainty to firms hoping to avoid the burdensome investigatory powers of the FTC.

Ultimately, on July 23, when the FTC issued its final decision and order in the Motorola Mobility matter, the FTC decided to remove from its original complaint the count alleging that Google had engaged in unfair or deceptive acts or practices. That count also made specific reference to the typical rule of reason balancing test – weighing the injury to consumers or competition against the benefits. Thus, the FTC limited Google’s Section 5 unfair competition violation to the standard-setting context. These changes were made to address some of the comments received by the FTC and also (likely) to appease Chairwoman Ramirez, who dissented from that part of the initial decision, but signed on without reservations to the final decision.

Commissioner Wright’s Proposal: A Promising Start

After promising in April to provide a detailed proposed standard for Section 5 enforcement, Commissioner Wright laid out his proposal on June 19, addressing what would garner FTC attention under Section 5. His proposal has two main prongs:

  • the alleged unfair method of competition must harm competition as it is understood by the traditional antitrust laws, and

  • the unfair method of competition must lack cognizable efficiencies.

With respect to the first prong, Commissioner Wright argues that application of such a standard will force the FTC to use its authority only in cases where a cognizable economic harm is found. This harkens back to the traditional premise of the antitrust laws – the law protects consumers – not competitors. Consumers are typically harmed by "increased prices, reduced output, diminished quality or weakened incentive to innovate." In a recent speech, Commissioner Wright noted that the FTC should not challenge conduct under Section 5 "where there is well-forged case law under the traditional federal antitrust laws."

Commissioner Wright argues, however, that his proposal is broader than traditional antitrust statutes because it would not require that the harm had already taken place, rather the proposed standard of likely harm, allowing the FTC to go after actions that may fall outside of the scope of the traditional antitrust laws, such as invitations to collude and unfair practices used to acquire market power that does not yet rise to the level of monopoly power.

With respect to the second prong – lack of cognizable efficiencies – Commissioner Wright refers us to the Horizontal Merger Guidelines. The efficiencies must be verifiable and not the result of anticompetitive reductions to output or service. They also cannot be achieved absent the potentially anticompetitive result. Commissioner Wright argues that this will provide a clear test, focusing the FTC on practices that will most harm consumers and not deter "consumer-welfare enhancing business practices."

This is a sweeping proposal that will give the FTC the continued ability to use Section 5, but it will severely limit the cases it pursues, if adopted. No longer will the FTC be able go after business arrangements that harm competitors, such as exclusive distributorships, unless a clear harm to consumers can be shown. Further, business conduct that generates efficiencies otherwise unachievable would not be challenged under Section 5, even though it also generates anticompetitive effects. Accordingly, Commissioner Wright’s proposed standard would create "a bright-line efficiencies screen" and put an end to the FTC’s practice of weighing the benefits against the harm.

The Other Commissioners’ Views

In sharp contrast to the proposal by Commissioner Wright, Chairwoman Ramirez believes that case-by-case development is the appropriate way to develop Section 5 jurisprudence, and ongoing enforcement will be "careful" and "judicious." She exhibited restraint in the Google matter, objecting to the form of commitments made by Google in the search engine matter, though it is unclear what she would have preferred. Prior to the Google/Motorola decision she advocated for the ITC to follow the U.S. jurisprudence of making it more difficult for SEP holders to get injunctions. But, Chairwoman Ramirez dissented from the initial Google/Motorola decision, finding that the use of Section 5 there departed too dramatically from the 1980 Statement. However, she did note that there may be times when Section 5 may address harm to the competitive process in the SEP context.

Commissioner Julie Brill (D) views Section 5 as a broad mandate and has authored many of the FTC’s Section 5 enforcement statements. She, like Chairwoman Ramirez, has expressed reluctance against issuing a standard, preferring a case-by-case approach.

Commissioner Ohlhausen, like Commissioner Wright, is concerned about the perception of intellectual property value and has been reluctant to exercise Section 5 authority in matters related to technology. In addition to her dissent in Google/Motorola, she also voted against using Section 5 in the Robert Bosch SEP matter. On July 25, Commissioner Ohlhausen made a speech in which she laid out her proposals for Section 5. She said that it should only be used:

  • in cases of substantial harm to competition, resulting in diminution of consumer welfare by reducing output, raising prices, or lowering quality

  • in cases where there is no procompetitive justification for the challenged conduct or where the conduct actually results in harm to competition that outweighs the benefits

  • in such a manner as to avoid or minimize conflicts with other institutions, particularly the DOJ

  • when it is grounded in robust economic evidence regarding anticompetitive effects, and

  • after the FTC has considered using one of its non-enforcement tools, such as suggesting legislation, issuing reports and educational materials, instead of Section 5.

Finally, she called for the FTC to issue a policy statement with clear guidance on the use of Section 5.

On June 21, President Obama nominated Department of Justice Senior Counsel Terrell McSweeny (D) to serve as one of the three Democratic FTC commissioners. It remains to be seen what her approach to Section 5 will be.

So What Does This All Mean?

The FTC is currently in flux. It is one commissioner short (though McSweeny may be approved soon) and evenly split among Democrats and Republicans. This adds to the difficulties in getting a consensus to publish an updated standard, and to even agree to use Section 5.

Chairwoman Ramirez is opposed to publishing a standard; however, Commissioner Wright’s proposal is drawing a lot of attention in the antitrust community. This attention may very well lead to an open dialogue among the commissioners, particularly now that Commissioner Ohlhausen has vocalized her support for a standard. Even if such a discussion leads to a new standard, it will take time for the pressure to mount, the commissioners to meet, and then ultimately agree on a standard. This has been the greatest push towards a standard since the FTC’s Workshop on Section 5 in 2008, which failed to produce a standard; so it remains to be seen if a consensus can be reached. In the meantime, we should continue to see the FTC use Section 5 to challenge those practices it deems anticompetitive, but perhaps not as aggressively as in the more recent past.

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

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