On August 13, 2015, the Federal Trade Commission (FTC or the Commission) issued a policy statement describing the enforcement principles that guide the agency’s exercise of its authority to prosecute “unfair methods of competition” under Section 5 of the FTC Act.
On August 13, 2015, the Federal Trade Commission (FTC or the Commission) issued a policy statement describing the enforcement principles that guide the agency’s exercise of its authority to prosecute “unfair methods of competition” under Section 5 of the FTC Act. The bipartisan statement represents the first time the Commission has provided substantive guidance on its use of Section 5.
Section 5 has been the subject of considerable debate throughout much of the agency’s history because of the perceived difficulty in identifying precisely what constitutes an “unfair method of competition” in light of the broad statutory language enacted by Congress over 100 years ago. Many have argued that, in the absence of clearer guidance regarding the appropriate boundaries of Section 5, it is difficult for businesses to know whether their conduct might become the subject of an FTC investigation or enforcement action.
In recent years, the FTC has used Section 5 primarily to prosecute “invitations to collude” in which a company invites a competitor to collaborate on price, quantity or some other aspect of competition, but the competitor does not accept the offer. Because there is no “agreement” between the two, the conduct may not be captured by Section 1 of the Sherman Act. The FTC has taken the view that invitations to collude, even when unaccepted, nevertheless raise a serious risk of harm to competition and consumers, and therefore will be prosecuted as unfair methods of competition under Section 5.
Although the FTC has used Section 5 relatively infrequently outside of the invitations to collude context, the cases the Commission has prosecuted in recent years have involved several high-profile companies, required costly compliance with investigations, and resulted in the imposition of significant restrictions on the companies’ business conduct as conditions of settlement. As a result, it is important to understand when the Commission is likely to use Section 5 as a vehicle for enforcement.
In describing the analytical framework that guides the Commission’s application of Section 5, the Commission articulated three principles it follows in deciding whether to challenge conduct as an unfair method of competition:
- the FTC will be guided by the public policy underlying the antitrust laws, namely the promotion of consumer welfare;
- the FTC will evaluate the conduct in question under a framework similar to the “rule of reason”; that is, an act or practice challenged by the Commission must be likely to cause harm to competition, taking into account any associated efficiencies and business justifications; and
- the FTC will be less likely to challenge conduct as an unfair method of competition if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm.
The three principles memorialize a role for Section 5 separate from the traditional antitrust laws, namely the Sherman and Clayton Acts, but at the same time tether the agency’s enforcement decisions to well-established concepts in modern antitrust and economics. Key among these principles for businesses to understand is the FTC’s commitment to weigh a conduct’s competitive harm against its procompetitive efficiencies benefits when evaluating whether to pursue a Section 5 claim. Although the Commission’s policy statement is brief at just over 300 words, by explicitly incorporating the “rule of reason” framework that has been developed over the last 125 years, it provides antitrust counsel a clearer methodology with which to advise clients about the Section 5 risks associated with specific business conduct.
Whether the policy statement ultimately emboldens the Commission to use its Section 5 authority more regularly still needs to be seen but, going forward, the statement ensures that agency staff and businesses, together with their antitrust counsel, are all working with the same overarching set of rules.