On Nov. 10, 2022, the Federal Trade Commission (FTC) issued an expansive — and at times opaque — policy statement on its enforcement of the federal ban on “unfair methods of competition” under Section 5 of the FTC Act. This new Policy Statement, enacted by a 3-1 vote with the sole Republican appointed Commissioner Christine Wilson dissenting, is in step with recent FTC efforts toward more aggressive enforcement of federal antitrust laws — all while the courts continue to scrutinize the agency’s enforcement authority.
Companies should note what is largely considered a more expansive FTC view of “unfair methods of competition.” Failure to do so could invite an investigation or enforcement action that could result in forward-looking restrictions on business conduct and in potentially civil fines or disgorgement of profits.
The new Policy Statement is in line with an article published earlier this fall by Commissioner Alvaro Bedoya, advocating for a “return to fairness” as a guiding principle for expanded FTC enforcement, turning away from the efficiency-focused consumer welfare standard, which was the centerpiece of the FTC’s 2015 Section 5 Policy Statement. Commissioner Bedoya’s contemporaneous statement in support of the new Policy Statement (joined by Chair Lina Khan and Commissioner Rebecca Slaughter), delves into the legislative history of Section 5 to argue that promoting fairness, including to market participants such as small businesses, was Congress’ primary motivation in enacting Section 5: “Efforts have been made to limit the FTC’s enforcement of Section 5 on efficiency principles that Congress never wrote into law, but today’s policy statement returns the scope of enforcement to that originally intended by Congress.”
In a lengthy dissent, Commissioner Wilson criticizes the Policy Statement as (1) failing to provide meaningful guidance to business; (2) “repudiating” the consumer welfare standard and “ignor[ing] the Supreme Court’s admonition that antitrust ‘protects competition, not competitors’”; and (3) rejecting prior precedent “that requires the agency to demonstrate a likelihood of anticompetitive effects, consider business justifications, and assess the potential for procompetitive effects before condemning conduct,” and instead “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.”
Read together, the policy statement and the statements by the Commissioners and Chair provide a window into the key debates about the values and purpose of antitrust enforcement today.
Background
Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce.” That statement and what conduct it prohibits beyond that already covered by other antitrust statutes, has been a longstanding question in antitrust law.
The Nov. 10 Policy Statement replaces a prior 2015 policy statement, in which the FTC declared that it would use the “rule of reason” to assess conduct under Section 5. That test asks whether a restraint of trade is “reasonable” by balancing its anticompetitive effects against procompetitive justifications. The FTC last year claimed that the 2015 guidance’s reliance on the rule-of-reason test “hamstrings its enforcement mission” and that the guidance “contravenes the text, structure, and history of Section 5.”
FTC’s New Policy on “Unfair Methods of Competition”
In the Nov. 10 Policy Statement, the FTC reinterpreted the scope of its Section 5 authority. The Policy Statement claims this new interpretation is more consistent with Congress’ original intent that Section 5 should cover “a broader range of anticompetitive conduct than can be reached under the Clayton and Sherman Acts.” The FTC added that Congress’ intent is in line with precedent in the federal courts of appeal, which it noted have “consistently held [its] authority extends not only to ‘the letter,’ but also to ‘the spirit’ of the antitrust laws.”
Against this backdrop, the FTC devised a two-part test to identify unfair methods of competition under Section 5.
- Method of Competition. First, the conduct must be a “method of competition.” A method of competition “is conduct undertaken by an actor in the marketplace” that implicates competition, even if only indirectly. In contrast, a condition of competition is a feature of the market that restricts competition but is not the result of a particular actor’s conduct (such as high barriers to entry).
- Unfairness. Second, the method of competition must be “unfair,” meaning conduct that goes beyond “competition on the merits,” or conduct that, even though it may result in market participants being harmed or forced out of the market, is procompetitive because it flows from greater efficiency, higher quality, superior innovation, etc. For example, a dominant company’s practice of engaging in predatory, below-cost pricing to take market share from rivals to force them from the market is not competition on the merits. However, the same company’s implementation of a manufacturing line that cuts costs, and therefore prices, to take market share from rivals is competition on the merits. Two criteria guide the FTC’s unfairness determination:
- Is the Conduct Unfair? Conduct may be unfair when it is “coercive, exploitive, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature,” or is otherwise “restrictive or exclusionary.”
- Does the Conduct Tend to Harm Competition? To go beyond competition on the merits, conduct must “tend to negatively affect competitive conditions,” “whether by affecting consumers, workers, or other market participants.” This criterion focuses on potential harm in addition to actual harm, and measuring those effects requires examining “the commercial setting.” Relevant factors include a company’s “size, power, and purpose,” and the conduct’s “current and potential future effects.” Even though a company’s size and power may be relevant, the FTC clarified that this analysis does not require “a separate showing of market power or market definition.”
Examples of Unfair Methods of Competition
Although Commissioner Wilson’s Dissent criticizes the Policy Statement for failing to “provide clear guidance to businesses seeking to comply with the law,” the Policy Statement does set forth examples of conduct deemed unfair methods of competition that violate Section 5. While the list is not exhaustive, the selection of examples may give some insight into how the FTC may seek to use Section 5 in enforcement actions going forward.
Defenses and Justifications
As noted, the Policy Statement abandons the rule-of-reason framework in favor of weighing these criteria using a “sliding scale.” Unlike under a rule-of-reason analysis, the FTC will not perform a cost-benefit analysis or look to net efficiencies. Instead, it will consider “a variety of non-quantifiable” harms and benefits as well as the “nature of the harm.” The more the conduct is “facially unfair,” the less the FTC says it needs to show a negative impact on competition and the less it needs to consider whether the conduct was justified. For conduct that is not facially unfair, the need for in-depth analysis and the role of defenses and justifications become more important.
Given these disparate qualitative considerations, it is hard to predict how the FTC will treat justifications for unfair conduct. As Commissioner Wilson worried in dissent, the new framework “approximates per se condemnation,” where the only inquiry is whether facially unlawful conduct occurred, not whether it had an anticompetitive effect or whether it had a legitimate business justification.
The Path Ahead
Though it attempts to redefine a key antitrust statute, the new Policy Statement has limited effect on its own. It does not, for instance, bind courts or the FTC’s administrative law judge to the FTC’s interpretation of “unfair methods of competition” under Section 5. Nor does it require courts to adhere to the FTC’s new framework for evaluating potential Section 5 violations. Parties may challenge whether Section 5 provides the FTC with the authority to bring enforcement actions in the areas outlined in the Policy Statement. Coincidentally, the FTC issued the Policy Statement days after the U.S. Supreme Court heard oral arguments in Axon Enterprise, Inc. v. FTC, a case that may chip away at the constitutionality of FTC administrative enforcement proceedings by allowing parties to challenge the FTC’s procedure in federal court before adjudication of an enforcement action.
Still, companies should take the new Policy Statement seriously. At the very least, it signals increased FTC enforcement of conduct that previously would not have attracted the attention of the antitrust agencies. An increase in enforcement actions, even if ultimately not successful, can prove costly for companies. While the FTC cannot obtain monetary remedies for first-time violations of Section 5, it can obtain onerous injunctive relief by restricting certain conduct or even blocking proposed transactions. Once companies are under consent decrees or otherwise put on notice that the FTC considers certain actions to be violations of Section 5, subsequent violations can result in civil penalties.
Given these consequences, companies should examine whether conduct complies with the FTC’s new policy. In particular, conduct that could be argued to fall within one of the categories in the chart above should be closely reviewed for antitrust risk.