New FTC Policy Has Potential to Significantly Broaden “Unfair Methods of Competition” Enforcement

• The Federal Trade Commission (FTC) announced a new policy regarding the circumstances in which it might seek to take action against unfair methods of competition under Section 5 of the FTC Act.
• In recent history, the FTC has used its Section 5 authority in relatively limited circumstances. Going forward, a wide range of conduct that does not violate the antitrust laws could be subject to FTC enforcement action.

On November 10, the FTC issued a Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act. This comes after the FTC rescinded an earlier Section 5 policy statement last year. In the new policy statement, the FTC sets out various criteria it will use to determine whether a method of competition is “unfair” and therefore violates Section 5.

Section 5 of the FTC Act, 15 USC § 45, declares “unfair methods of competition” to be “unlawful” and “empower[s] and direct[s]” the FTC to prevent persons, corporations and certain other entities from using such methods. To do so, the FTC may bring an administrative proceeding for a cease and desist order. Also, if the FTC believes that a violation is occurring or about to occur, it may seek an injunction in federal district court. (There is no private right of action for Section 5 violations.) The FTC Act does not define “unfair methods of competition.”

Much of the debate surrounding Section 5 concerns the extent to which it is broader than the Sherman Act, which prohibits unreasonable restraints of trade and monopolization, or the Clayton Act, which governs mergers and acquisitions. The FTC has long asserted a “standalone” Section 5 authority, but until recently it was the policy of the Commission to use this authority only in narrow circumstances. For example, under the earlier policy, in “deciding whether to challenge an act or practice as an unfair method of competition in violation of Section 5 on a standalone basis” the FTC would “be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare.” Under that policy “an act or practice challenged by the Commission [using standalone authority] must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justification.” In practice, this meant that the FTC rarely brought Section 5 actions. Typically, it brought actions only against so-called “invitations to collude,” which, if consummated, would have violated Section 1 of the Sherman Act, and problematic exchanges of non-public competitively-sensitive information which may have facilitated anticompetitive coordination. The FTC also occasionally used Section 5 authority to bring claims related to patent licensing.

The FTC’s new policy is much broader. According to the FTC’s new statement, “unfair” competition involves conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or [that] involve[s] the use of economic power of a similar nature,” or is “restrictive or exclusionary.” Also, “the conduct must tend to negatively affect competitive conditions.” The policy statement says that this “may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers” and includes “raising prices, reducing output, . . . reducing innovation, . . . or reducing the likelihood of potential or nascent competition.” The policy “is purposely focused on incipient threats to competitive conditions” rather than on “whether the conduct directly caused actual harm in the specific instance at issue.”

Of course, many of these concepts are already found in the Sherman Act. For example, Section 1 prohibits certain types of collusion; and, depending on the circumstances, Section 2 generally prohibits monopolists from engaging in coercive, exploitative, abusive, predatory or exclusionary conduct, or conduct that forecloses markets. Other laws prohibit deceptive acts. But one key distinction between the Sherman Act and the FTC’s interpretation of Section 5 is that, in the FTC’s view, Section 5 applies to “incipient” threats to competition. The FTC’s statement also says that “Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions.” Indeed, as this suggests, “the inquiry will not focus on the ‘rule of reason’” used in evaluating many Sherman Act claims. The rule of reason generally allows the weighing of procompetitive justifications, but the FTC’s new policy expressly limits the circumstances in which justifications could offset a finding of unfairness.

According to the statement, the FTC will weigh unfairness and negative effects on competitive conditions on a “sliding scale” such that “less may be necessary to show a tendency to negatively affect competitive conditions” when unfairness is clear. According to the statement, the “size, power, and purpose of the respondent may be relevant, as are the current and potential future effects of the conduct.”

The statement lists numerous “historical examples” of unfair methods of competition, “for the purpose of providing further guidance” as to what conduct might violate Section 5. The statement notes that the examples are “illustrative” and “non-exclusive.” They include:

• mergers “that have the tendency to ripen into violations of the antitrust laws;” serial merger activity that “that tend[s] to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws;” and “mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition;”
• “interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act;”
• invitations to collude; “practices that facilitate tacit coordination;” and “parallel exclusionary conduct that may cause aggregate harm;”
• “loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry;” “de facto tying, bundling, exclusive dealing, or loyalty rebates that use market power in one market to entrench that power or impede competition in the same or a related market;” “price discrimination claims such as knowingly inducing and receiving disproportionate promotional allowances against buyers not covered by Clayton Act;” and “discriminatory refusals to deal which tend to create or maintain market power;”
• “fraudulent and inequitable practices that undermine the standard-setting process or that interfere with the Patent Office’s full examination of patent applications;”
• “using market power in one market to gain a competitive advantage in an adjacent market by, for example, utilizing technological incompatibilities to negatively impact competition in adjacent markets;”
• “commercial bribery and corporate espionage that tends to create or maintain market power;” and
• “false or deceptive advertising or marketing which tends to create or maintain market power.”

While the policy statement provides some examples of conduct that the FTC may seek to challenge, the statement notes that these are “non-exclusive” and “illustrative.”

Significance. The FTC’s action is significant because it signals that the FTC intends to take action against a broader range of conduct it deems to be unfair and therefore more companies may be targets for FTC cease and desist orders. Indeed, the expansion of conduct potentially subject to Section 5 enforcement creates the risk of introducing uncertainty into a wide range of areas and of chilling conduct (mergers and business practices) that may be lawful under the Sherman and Clayton Acts. To be sure, in any action brought under Section 5, the FTC would ultimately have to persuade a court to agree with it if a defendant mounts a challenge. It remains to be seen what types of enforcement actions the FTC will bring under this new policy and companies would do well keep up to date on FTC enforcement actions in this evolving area.

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