On November 10, 2022, the Democratic commissioners at the Federal Trade Commission (FTC) voted out a new policy statement outlining how the agency views its authority to challenge conduct as an “unfair method of competition” under Section 5 of the FTC Act. The policy statement seeks to breathe new life into a provision of the 1914 law that historically has found very limited application and to deliver on the Biden Administration’s promise of increasing antitrust enforcement across the US economy. Under the new policy statement, the FTC seeks to assert broad discretion to challenge a wide range of business practices that previously have been viewed as lawful under the traditional antitrust laws. It remains to be seen how the FTC will implement the policy statement, what conduct it will challenge as “unfair,” and importantly, whether the courts will agree with the agency’s interpretation when presented with an actual case.
History of Section 5 of the FTC Act
Section 5 of the FTC Act prohibits “unfair methods of competition.” Although Congress did not define what precisely constitutes an “unfair method of competition,” it is widely accepted that Section 5 was intended to reach conduct not covered by the traditional antitrust laws, such as the Sherman and Clayton Acts. Congress instead left it to the FTC—using its expertise and experience—to articulate what types of conduct are “unfair methods of competition.” But since the passage of the FTC Act more than a century ago, the FTC has rarely used Section 5, choosing instead to rely on the traditional antitrust laws, which has resulted in a rich body of case law that rigorously describes how to distinguish lawful competition on the merits from unlawful anticompetitive conduct. The only conduct that has consistently been prosecuted as an “unfair method of competition” is an invitation to collude—when a competitor asks its rival to collude but that offer is not accepted.
Given the continued uncertainty about the scope of Section 5 and calls by some to use it more aggressively, the FTC issued a policy statement in 2015, based on its century of antitrust enforcement experience, to put guardrails on the agency’s exercise of discretion and to give the business community more insight into the guiding principles the agency used in considering whether to enforce the statute. The 2015 policy statement confirmed that the agency’s focus was on “the promotion of consumer welfare” and that it would analyze potential violations “under a framework similar to the rule of reason . . . taking into account any associated cognizable efficiencies and business justifications.” The FTC rescinded the 2015 policy statement in 2021 on a 3-2 party-line vote.
New Expansive Scope of 2022 Policy Statement
The FTC approved the new 2022 policy statement on a 3-1 party-line vote, with Commissioner Christine Wilson dissenting. The policy statement lays out an expansive definition of what is an “unfair method of competition.” In particular, it provides that:
- A “method of competition” is any “conduct undertaken by an actor in the marketplace,” including conduct that has an indirect relationship to competition, such as “misuse of regulatory processes that can create or exploit impediments to competition (such as those related to licensing, patents, or standard setting).”
- A method of competition is “unfair” if it is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature” and it “tend[s] to negatively affect competitive conditions.” The clearer the “indicia of unfairness” are, the less necessary the FTC believes it is to show a tendency to negatively affect competitive conditions.
A key feature of the new policy statement is a focus on catching antitrust violations in their incipiency. “Unfair” conduct can be any conduct that “has a tendency to generate negative consequences” either “when examined in the aggregate along with the conduct of others engaging in the same or similar conduct, or when the conduct is examined as part of the cumulative effect of a variety of different practices.” Significantly, the policy statement abandons the longstanding requirement of showing that a competitor has market power in order to show competitive harm. The policy statement also expresses skepticism of efficiencies and business justifications that businesses may raise to defend commercial conduct.
Potential “Unfair Methods of Competition”
The policy statement identifies a non-exhaustive list of examples of conduct it views as falling within the categories of conduct that violate Section 5, including, for example:
- mergers involving nascent or potential competitors;
- a series of mergers that would not individually have violated the antitrust laws;
- loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to become antitrust violations by virtue of industry conditions;
- practices that facilitate tacit coordination;
- conduct undertaken with other practices that cumulatively tend to undermine competitive conditions;
- “fraudulent and inequitable” conduct relating to patent applications or standard setting;
- price discrimination that the Clayton Act does not already address;
- de facto tying, bundling, exclusive dealing, or loyalty rebates that use market power to impede competition in the same or a related market;
- commercial bribery and corporate espionage that tends to create market power; and
- false or deceptive advertising or marketing that tends to create market power.
Commissioner Wilson released a detailed dissenting statement criticizing the policy statement on several grounds. She believes the policy statement adopts “an ‘I know it when I see it’ approach premised on a list of nefarious-sounding adjectives, many of which have no antitrust or economic meaning.” Commissioner Wilson also is concerned that the policy statement diminishes the relevance of legitimate business justifications for undertaking the practices being scrutinized; rejects the consumer welfare standard in favor of an approach that “advances the welfare of inefficient competitors, ‘workers,’ and other unnamed but politically favored groups;” and ignores relevant legal precedent.
The new “unfair methods of competition” policy statement foreshadows an expansive approach to the FTC’s antitrust enforcement agenda. Exactly how the FTC will use its authority in practice remains to be seen, but going forward businesses should carefully consider whether their conduct might constitute an “unfair method of competition” despite being lawful under the traditional antitrust laws. In time, the courts also are likely to provide guidance on how to interpret Section 5 and the appropriate contours of the FTC’s “unfair methods of competition” authority.