The U.S. Federal Trade Commission ("FTC") has issued formal guidance on how the agency enforces Section 5 of the FTC Act ("Section 5") to police "unfair methods of competition" that may fall outside of the scope of the main federal antitrust statutes, the Sherman and Clayton Acts. While the statement consists of only three bullet points, this is the first formal statement of enforcement principles regarding "unfair methods of competition" under Section 5 issued by the FTC since the enactment of Section 5 more than 100 years ago. Some have criticized the statement for its brevity and lack of details, while others have praised it for filling the void and providing some potential limiting principles on a "know it when you see it" approach to Section 5 enforcement. The bottom line is that the statement can now be used by businesses and their lawyers to try to convince the Commission not to bring Section 5 enforcement actions, but this may not prevent the current or a future Commission from bringing controversial cases.
In 1914, Congress enacted Section 5, empowering the FTC to challenge "unfair methods of competition." Over several decades, the Supreme Court took an expansive view on the scope of Section 5, concluding that the statue was broader than the Sherman Act and that "unfair or deceptive" practices could be covered even absent an effect on competition. See, e.g., Fed. Trade Comm'n v. Sperry & Hutchinson Co., 405 U.S. 233, 239 (1972). As former FTC Chairman Kovacic later explained "Section 5 was deliberately created to have an extraordinary possibility for elastic adaptation and adjustment."
In the 1970s, the FTC brought a number of highly controversial standalone Section 5 enforcement actions. Then in the early 1980s, courts of appeals overturned three of these cases based on insufficient evidence of anticompetitive harm or concern with the FTC's arbitrary application of Section 5. For the next two decades, the FTC was fairly restrained in bringing "standalone" Section 5 enforcement actions (Section 5 actions challenging conduct that was not claimed to violate a mainline antitrust statute). However, in recent years the FTC has increased its standalone use of Section 5 and hinted that it intends to pivot to more expansive enforcement. It has challenged not only invitations to collude (a standalone use of Section 5 that has raised less objection), but also failures to uphold standard-setting commitments and the use of discounts based on share of purchases allegedly to exclude rivals. Indeed, as recently as 2008, the Commission cited Sperry & Hutchinson for the proposition that the FTC has the "authority to constrain, among other things 'deception, bad faith, fraud or oppression'." Statement of the Federal Trade Commission, In re Negotiated Data Solutions LLC (2008) at 2.
The FTC's recent Section 5 actions were settled with consent orders. The absence of meaningful limiting principles in the Commission's statements accompanying the consent orders, and the Commission's reference to deception, bad faith, fraud or oppression untethered from antitrust principles, raised concern that the FTC's interpretation of "unfair methods of competition" was, as one commentator put it, opening a dangerous Pandora's box. Many in the antitrust bar and Commissioners Joshua Wright and Maureen Ohlhausen urged the FTC to issue Section 5 guidance so that businesses would have more guidance on what types of conduct would be covered under the statute.
Last week the Commission responded with a policy statement that includes the following three principles:
- the Commission will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare;
- the act or practice will be evaluated under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and
- the Commission is less likely to challenge an act or practice as an unfair method of competition on a standalone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.
The statement was adopted by a 4-1 vote. Commissioner Ohlhausen dissented, arguing that the abbreviated guidance raised more questions than it answered and "could easily accommodate a host of controversial theories." Commissioner Ohlhausen also stated that the statement does not discuss any case precedents nor provide any examples of lawful or unlawful conduct. In a speech given the same day as the statement, Chairwoman Ramirez countered by explaining that more detailed guidance would be neither feasible nor advisable and that the statement does provide useful guidance in that the Commission intends to rely on traditional antitrust concepts in developing Section 5 precedent.
What does the statement tell us?
The new statement does allow some insights into future FTC enforcement:
First, the statement confirms that the FTC will not use Section 5 for non-antitrust public policy reasons, as some feared after the FTC in 2008 asserted the authority to go after such broad and undefined conduct as bad faith or oppression.
Second, the statement tells us that the Commission still wants to leave a good deal of flexibility in deciding what constitutes a standalone Section 5 violation and develop the scope of Section 5 on a case-by-case basis.
Antitrust lawyers should be able to use the statement to argue to the Commission and agency staff that certain conduct does not amount to a standalone Section 5 violation. This could include arguments that the challenged conduct in fact enhances consumer welfare or has legitimate business justifications that outweigh the alleged harm and that the traditional antitrust laws are sufficient to cope with the conduct in question. In reality, these are the same arguments that the antitrust lawyers are making today. One might expect these arguments will carry more weight in light of the new statement. However, the statement only provides broad principles and is subject to interpretation, which will give the current and future Commission flexibility in applying it.
FTC's August 13, 2015 "Statement of Principles Regarding Enforcement of FTC Act as a Competition Statute" can be found on its website.