After years of academic debate and internal deliberation, the Federal Trade Commission today unveiled a “Statement of Enforcement Principles” that vaguely describes conduct prohibited by Section 5 of the FTC Act.

Section 5 gives the FTC authority to take action against “unfair methods of competition.”  Legislative history indicates that it was left to the FTC to provide specific content to Section 5’s broad language. Since its enactment 100 years ago, however, little clarity has developed regarding what conduct does and does not qualify as an “unfair method of competition” that might subject an actor to enforcement proceedings, litigation, or penalties brought by the FTC.

It is generally agreed that “unfair methods of competition” was intended to cover at least the same conduct that would violate the Sherman or Clayton Acts. But, in recent years, the scope of the FTC’s “standalone” Section 5 enforcement authority—Section 5-based challenges to conduct that would not necessarily violate the Sherman or Clayton Acts—has been a volatile topic, with many in the business and antitrust community calling for the FTC to provide guidance on the boundaries of its Section 5 authority.

FTC commissioner Joshua Wright joined the call for Section 5 guidance in June 2013, with a request that the FTC issue a policy statement defining the agency’s standalone Section 5 authority as covering acts or practices that harm or will likely harm competition and lack cognizable efficiencies. Congress also took an interest in the issue in October 2013, with six members of the House Judiciary Committee and two U.S. senators urging FTC chairwoman Edith Ramirez to issue guidance regarding its standalone Section 5 authority.

The calls for guidance came to a head at a BakerHostetler-sponsored Symposium on Section 5 this past February, when Commissioner Wright, during the keynote speech, challenged his follow commissioners to adopt formal Section 5 guidelines. He even took the step of proposing three possible definitions—differing only in their treatment of efficiencies—and announced that he would move the Commission to vote on which of the three to adopt. (Recordings of the Symposium can be found here.)

Following the Symposium and release of a BakerHostetler White Paper, the FTC today issued a policy statement providing guidance on Section 5. The Statement explains that, consistent with FTC precedent, the Commission will adhere to the following principles when deciding whether to use its standalone Section 5 authority to challenge unfair methods of competition:

  • 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 is notable for adopting a framework similar to the “rule of reason” for assessing unfair methods of competition under Section 5. This framework, developed under the antitrust laws over the past 125 years, generally balances the actual anti- and pro-competitive effects of challenged conduct, and is well understood by courts, competition agencies, the business community, and antitrust practitioners. In referring to consumer welfare and conduct likely to cause harm, however, the FTC also retains flexibility to apply its Section 5 authority to conduct that might not violate the antitrust laws under a traditional rule of reason analysis.

While the Statement provides guidance of the type that has been debated and sought for years, its sparse terms leave a number of questions about Section 5 unanswered, such as what constitutes “associated cognizable efficiencies” or “business justifications”? This lack of detail, plus disagreement with the process leading to the Statement, prompted Commissioner Maureen Olhausen to issue a forceful dissent from the Statement. Answers to these important questions will, no doubt, be the subject of additional debate and possibly litigation in the near future. Please come back for additional analysis and updates.