Federal Trade Commission Announces Expanded Enforcement Authority Under Section 5 of the FTC Act

The Federal Trade Commission (FTC) issued long-awaited guidance regarding its interpretation of the scope of Section 5 of the FTC Act on November 10, 2022. The updated guidance expands what the FTC may consider to be “unfair” competition in violation of Section 5, including conduct that the FTC deems to be contrary to the “spirit” of the antitrust laws.

In dissent, Commissioner Christine S. Wilson lambasted the guidance as telling respondents that once conduct is deemed “facially unfair” by the FTC, respondents will essentially be told, “Go directly to jail. Do not pass go. Do not collect $200.”

Key Takeaways

The FTC issued the policy statement regarding the scope of unfair methods of competition under Section 5 of the FTC Act on November 10, 2022. [1] The 16-page policy statement, which was approved by Democratic commissioners in a 3-1 vote, fills the void left from the FTC’s July 1, 2021, recission of its prior 2015 bipartisan enforcement guidance, but raises significant questions regarding what conduct the FTC will consider to be unlawful and what defenses may be available. [2]

At the outset, the policy statement provides an overview of the legislative history of the FTC Act, and argues that the history is “replete with statements to the effect that Congress wanted the FTC to stop monopolies in their ‘incipiency.’” [3] Congress, the Commission majority argues, struck an intentional balance by granting the independent agency enforcement authority beyond the Clayton and Sherman Acts while also providing for federal appellate review. [4]

The policy statement sets forth broad principles under which conduct will be deemed to be an “unfair method of competition” and the role of potential justifications for the conduct. In dissent, Commissioner Wilson faults the majority for taking unwarranted and sweeping steps including (1) abandoning the rule of reason framework, (2) repudiating the consumer welfare standard, and (3) rejecting the vast body of precedent that requires the Commission to consider business justifications and assess procompetitive effects before condemning conduct. [5]

Defining Unfair Competition

Section 5(a) of the FTC Act provides that “unfair methods of competition in or affecting commerce . . . are . . . declared unlawful.” [6] Under its prior 2015 guidance, the FTC largely limited its enforcement authority to violations of the Sherman Act and the Clayton Act. [7] That is now changing.

The policy statement establishes a two-step framework to identify unfair methods of competition. First, conduct must be “a method of competition,” defined as conduct that implicates competition (even indirectly) rather than a market condition. [8] Second, the conduct must be “unfair,” defined as conduct “beyond competition on the merits.” [9]

The policy statement identifies two criteria to determine if conduct is “unfair.” First, conduct may be “coercive, exploitive, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature,” or “otherwise restrictive or exclusionary.” [10] Second, “the conduct must tend to negatively affect competition conditions” by “affecting consumers, workers or other market participants.” [11] The policy statement directs the criteria to be weighed using a sliding scale. Where the FTC considers the indicia of unfairness to be clear, it will give less consideration to the effect on competitive conditions. [12]

The policy statement sets forth examples of conduct that it will consider “unfair” including (1) actual violations of the antitrust laws, (2) “incipient” violations of the antitrust laws, and (3) conduct that violates “the spirit of the antitrust laws.” [13]

“Incipient” violations of the antitrust laws are described as conduct by respondents who have not gained full-fledged monopoly or market power, or conduct that has the tendency to ripen into violations of the antitrust laws, including (1) invitations to collude, (2) mergers, acquisitions, or joint ventures that “have the tendency to ripen into violations of the antitrust laws”; (3) a series of mergers, acquisitions, or joint ventures that “tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws”; and (4) 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.” [14]

The final category, conduct that violates the “spirit” of the antitrust laws, may prove to be the most elusive to define, and it appears to include conduct that is explicitly lawful under the antitrust laws. For example, the policy statement highlights “practices that facilitate tacit coordination” as contrary to the “spirit” of the antitrust laws. But as explained by Judge Posner in the Text Messaging litigation, “Tacit collusion, also known as conscious parallelism, does not violate section 1 of the Sherman Act. Collusion is illegal only when based on agreement.” [15]

There will thus be significant uncertainty for companies operating in concentrated markets where, as Judge Posner noted, rational competitors “watch each other like hawks.” [16]

Other conduct that may violate the “spirit” of the antitrust laws under the FTC’s view includes the following:

• Parallel exclusionary conduct that may cause aggregate harm
• Conduct by a respondent that is undertaken with other acts and 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 US 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
• A series of mergers or acquisitions that together tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws
• 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 that tends to create or maintain market power
• Discriminatory refusals to deal that tend to create or maintain market power [17]

Justifications for Conduct

The policy statement’s approach to justifications for allegedly unfair conduct provides little additional concrete guidance. The policy statement adopts a virtual “per se” rule against any conduct deemed to be “facially unfair.” What exactly constitutes “facially unfair” is undefined, but likely includes—but is not necessarily limited to—conduct that would otherwise be considered a per se violation of the antitrust laws (e.g., price fixing). [18]

As to conduct not deemed “facially unfair,” the policy statement explicitly abandons the rule of reason framework and adopts an open-ended inquiry. Under the policy statement’s framework, the Commission will consider the effects of conduct on consumers, labor, competitive rivals, and potentially others, but there will not be “a net efficiencies test or a numerical cost-benefit analysis.” [19]

According to the policy statement, the more “facially unfair and injurious the harm,” the less likely it is to be overcome by a countervailing justification. In dissent, Commissioner Wilson criticized the policy statement’s “expansive ‘I know it when I see it’ approach that seeks to protect interests beyond those of consumers.” [20]

What’s Next: Our Thinking

As a practical matter, the FTC’s policy statement has no immediate legal impact: it is not law and does not change the Commission’s burden on appeal. But the symbolic impact is significant.

The policy statement strongly suggests increased FTC enforcement activity with respect to conduct that is not clearly unlawful (and may be clearly legal) under the antitrust laws, such as corporate transactions involving nascent competition and consciously parallel market conduct in concentrated industries. Moreover, state enforcers frequently align with the FTC’s national enforcement agenda and these enforcers may likewise focus on conduct within the FTC’s expansive framework.

The remaining wildcard is what impact, if any, changes in the political climate will bring in the next two to four years. But given the vast breadth of conduct that may be swept in by the FTC’s recent policy statement, companies are well advised to consult with antitrust counsel with experience before the FTC to evaluate whether, and to what extent, the policy statement creates additional enforcement risk.