On November 10, 2022, the FTC by a 3-1 party line vote issued a new “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act” (“Policy Statement”), formally declaring that the FTC’s “unfair methods of competition” (“UMC”) authority under Section 5 extends beyond the bounds of the Sherman and Clayton Acts to encompass a vast array of allegedly “unfair” practices that “tend to negatively affect competitive conditions.” As described in more detail below, the Policy Statement effectively abandons a rule of reason of analysis, instead giving the FTC broad discretion to determine that conduct is “unfair” without proof of market power or evidence of anticompetitive effects, and without regard to procompetitive justifications or potential efficiencies. The breadth of the Policy Statement strongly suggests that the Commission will double down on aggressive UMC enforcement in areas well outside the traditional scope of the consumer welfare standard, including efforts to advance worker welfare, protect small businesses, and block acquisitions of nascent competitors, among others.
The Policy Statement follows after Chair Khan and the other majority Commissioners voted in July 2021 to rescind the FTC’s 2015 bipartisan Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under the FTC Act (“2015 Statement”). The 2015 Statement had declared that the FTC would only exercise its “standalone” Section 5 authority using “a framework similar to the rule of reason,” aligning the FTC’s UMC enforcement with the Sherman and Clayton Acts. The vote to withdraw the 2015 Statement was an early indication that the new Commission intended to push the boundaries of the antitrust laws through its Section 5 enforcement, but it provided no guidance to businesses about what types of conduct the FTC might deem “unfair” or how businesses could structure their conduct to comply with the law.
While ostensibly intended to provide such guidance, the new Policy Statement contains few specifics about the particular conduct that the Commission might deem to be unfair, and suggests that the FTC has broad discretion to challenge nearly any conduct with which it disagrees. Citing the legislative history of the 1914 FTC Act, the Policy Statement argues that Congress, by giving the FTC authority to police unfair methods of competition, gave the new agency broad flexibility to stop anticompetitive practices in their “incipiency,” regardless of a showing of current anticompetitive harm or anticompetitive intent. It concludes that the Supreme Court has repeatedly affirmed this broad view of the scope of Section 5, citing principally to cases decided in the 1950s and 60s, and states that the FTC’s authority therefore extends not only to “the letter” but also to “the spirit” of the antitrust laws. In many ways, the Policy Statement significantly increases uncertainty for businesses because the FTC appears willing to challenge conduct that courts have repeatedly refused to condemn under the antitrust laws, including tacit coordination, parallel conduct, price discrimination not covered by the Robinson-Patman Act, exclusive dealing, and mergers that do not violate the Clayton Act, among other things.
The Policy Statement Adopts a Near “Per Se” View of Unfairness Without Regard to Proof of Anticompetitive Effects or Procompetitive Justifications
As set forth in the Policy Statement, conduct that violates the FTC’s UMC authority under Section 5 must be a “method of competition” that is “unfair.” The Policy Statement defines a “method of competition” as conduct undertaken by an actor in the marketplace, including conduct that implicates competition only indirectly, such as conduct related to licensing, patents, or standard setting. However, it does not extend to “conditions of the marketplace” (e.g., high concentration) or violations of generally applicable laws – such as environmental or tax laws – that give an actor a cost advantage.
The Policy Statement describes as “unfair” conduct anything that “goes beyond competition on the merits.” It cites two key criteria: first, the conduct must be “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature,” including conduct that is “otherwise restrictive or exclusionary.” Second, the conduct must “tend to negatively affect competitive conditions.” Notably, the Policy Statement contends that these principles should be weighed on a sliding scale, and that there may be little need to establish any tendency to negatively affect competitive conditions if “the indicia of unfairness are clear.” The Policy Statement also declares that conduct that tends to negatively affect competitive conditions can affect consumers, workers, or other market participants, and that the FTC need not establish that such conduct directly caused actual harm or make a separate showing of market power or market definition when the evidence “indicates” to the FTC that such conduct “tends to negatively affect competitive conditions.”
Notably, a majority of Commissioners believe that the FTC can simply ignore justifications as an affirmative defense in most standalone Section 5 cases. The Policy Statement rejects a net efficiencies test or a numerical cost-benefit analysis to evaluate justifications, arguing that the UMC framework allows the Commission to assess non-quantifiable harms along with justifications and purported benefits that may also be unquantified.
As Commissioner Wilson observes in a scathing dissent, the FTC’s Policy Statement appears to ignore and contradict precedent that requires the FTC to establish proof of anticompetitive effects and to consider business justifications. For example, the Policy Statement ignores the Ninth Circuit’s decision in Boise Cascade v. FTC,1 where the Ninth Circuit found that a Section 5 violation was not supported by substantial evidence when the Commission failed to provide evidence of meaningful anticompetitive effects. Similarly, the Policy Statement’s claim that the FTC can simply ignore business justifications contradicts modern precedent that has expressly identified business justifications as part of the test for UMC. For example, the Second Circuit in Ethyl observed that “in the absence of proof of a violation of the antitrust laws or evidence of collusive, coercive, predatory, or exclusionary conduct, business practices are not ‘unfair’ in violation of § 5 unless those practices either have an anticompetitive purpose or cannot be supported by an independent legitimate reason.”2
“Historical Examples” of Unfair Methods of Competition
The FTC’s Policy Statement includes a “non-exclusive” laundry list of past decisions and consent decrees that it claims illustrate the type of incipient conduct that violates the spirit of the antitrust laws. These practices include:
- Practices deemed to violate Sections 1 and 2 of the Sherman Act or the provisions of the Clayton Act
- Incipient violations of the antitrust laws, including conduct by respondents who lack market power, such as:
- invitations to collude,
- mergers, acquisitions and joint ventures that have the tendency to ripen into violations of the antitrust laws,
- a series of mergers, acquisitions or joint ventures which tend to bring about harms that antitrust laws were designed to prevent but may not individually have violated the law,
- 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.
- Conduct that violates the “spirit of the antitrust laws,” which may include:
- Practices that facilitate tacit coordination,
- Parallel exclusionary conduct that may cause aggregate harm,
- Conduct by a respondent that is undertaken with other actsand practices that cumulatively may tend to undermine competitive conditions in the market,
- Fraudulent and inequitable practices that undermine the standard-setting process or that interfere with the Patent Office’s full examination of patent applications,
- Price discrimination claims such as knowingly inducing and receiving disproportionate promotional allowances against buyers not covered by the Clayton Act,
- 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,
- Mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition,
- 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;
- Conduct resulting in direct evidence of harm, or likely harm to competition, that does not rely upon market definition,
- Interlocking directors and officers of competing firms not covered by the literal language of the Clayton Act,
- Commercial bribery and corporate espionage that tends to create or maintain market power,
- False or deceptive advertising or marketing which tends to create or maintain market power, or
- Discriminatory refusals to deal which tend to create or maintain market power.
The Commission is not shying away from controversy, even after a sobering trip to the Supreme Court earlier this week in the Axon case. The Policy Statement reflects the current Commission’s aggressive antitrust enforcement posture and it is likely that UMC enforcement actions will soon follow. Additionally, the Policy Statement asserts that the FTC has the authority to promulgate UMC rules, presumably under Section 6(g) of the FTC Act. Given Chair Khan’s previous statements about UMC rulemaking, it is likely that the Commission will attempt to promulgate rules prohibiting behaviors identified in the Policy Statement using streamlined notice-and-comment rulemaking procedures.
We will continue to closely follow these developments.
1 Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980).
2 E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 140 (2d Cir. 1984) (“Ethyl”).
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