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On Nov. 10, 2022, the Federal Trade Commission (FTC) issued an expansive — and at times opaque — policy statement on its enforcement of the federal ban on “unfair methods of competition” under Section 5 of the FTC Act. This new Policy Statement, enacted by a 3-1 vote with the sole Republican appointed Commissioner Christine Wilson dissenting, is in step with recent FTC efforts toward more aggressive enforcement of federal antitrust laws — all while the courts continue to scrutinize the agency’s enforcement authority.
Companies should note what is largely considered a more expansive FTC view of “unfair methods of competition.” Failure to do so could invite an investigation or enforcement action that could result in forward-looking restrictions on business conduct and in potentially civil fines or disgorgement of profits.
The new Policy Statement is in line with an article published earlier this fall by Commissioner Alvaro Bedoya, advocating for a “return to fairness” as a guiding principle for expanded FTC enforcement, turning away from the efficiency-focused consumer welfare standard, which was the centerpiece of the FTC’s 2015 Section 5 Policy Statement. Commissioner Bedoya’s contemporaneous statement in support of the new Policy Statement (joined by Chair Lina Khan and Commissioner Rebecca Slaughter), delves into the legislative history of Section 5 to argue that promoting fairness, including to market participants such as small businesses, was Congress’ primary motivation in enacting Section 5: “Efforts have been made to limit the FTC’s enforcement of Section 5 on efficiency principles that Congress never wrote into law, but today’s policy statement returns the scope of enforcement to that originally intended by Congress.”
In a lengthy dissent, Commissioner Wilson criticizes the Policy Statement as (1) failing to provide meaningful guidance to business; (2) “repudiating” the consumer welfare standard and “ignor[ing] the Supreme Court’s admonition that antitrust ‘protects competition, not competitors’”; and (3) rejecting prior precedent “that requires the agency to demonstrate a likelihood of anticompetitive effects, consider business justifications, and assess the potential for procompetitive effects before condemning conduct,” and instead “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.”
Read together, the policy statement and the statements by the Commissioners and Chair provide a window into the key debates about the values and purpose of antitrust enforcement today.
Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce.” That statement and what conduct it prohibits beyond that already covered by other antitrust statutes, has been a longstanding question in antitrust law.
The Nov. 10 Policy Statement replaces a prior 2015 policy statement, in which the FTC declared that it would use the “rule of reason” to assess conduct under Section 5. That test asks whether a restraint of trade is “reasonable” by balancing its anticompetitive effects against procompetitive justifications. The FTC last year claimed that the 2015 guidance’s reliance on the rule-of-reason test “hamstrings its enforcement mission” and that the guidance “contravenes the text, structure, and history of Section 5.”
FTC’s New Policy on “Unfair Methods of Competition”
In the Nov. 10 Policy Statement, the FTC reinterpreted the scope of its Section 5 authority. The Policy Statement claims this new interpretation is more consistent with Congress’ original intent that Section 5 should cover “a broader range of anticompetitive conduct than can be reached under the Clayton and Sherman Acts.” The FTC added that Congress’ intent is in line with precedent in the federal courts of appeal, which it noted have “consistently held [its] authority extends not only to ‘the letter,’ but also to ‘the spirit’ of the antitrust laws.”
Against this backdrop, the FTC devised a two-part test to identify unfair methods of competition under Section 5.
- Method of Competition. First, the conduct must be a “method of competition.” A method of competition “is conduct undertaken by an actor in the marketplace” that implicates competition, even if only indirectly. In contrast, a condition of competition is a feature of the market that restricts competition but is not the result of a particular actor’s conduct (such as high barriers to entry).
- Unfairness. Second, the method of competition must be “unfair,” meaning conduct that goes beyond “competition on the merits,” or conduct that, even though it may result in market participants being harmed or forced out of the market, is procompetitive because it flows from greater efficiency, higher quality, superior innovation, etc. For example, a dominant company’s practice of engaging in predatory, below-cost pricing to take market share from rivals to force them from the market is not competition on the merits. However, the same company’s implementation of a manufacturing line that cuts costs, and therefore prices, to take market share from rivals is competition on the merits. Two criteria guide the FTC’s unfairness determination:
- Is the Conduct Unfair? Conduct may be unfair when it is “coercive, exploitive, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature,” or is otherwise “restrictive or exclusionary.”
- Does the Conduct Tend to Harm Competition? To go beyond competition on the merits, conduct must “tend to negatively affect competitive conditions,” “whether by affecting consumers, workers, or other market participants.” This criterion focuses on potential harm in addition to actual harm, and measuring those effects requires examining “the commercial setting.” Relevant factors include a company’s “size, power, and purpose,” and the conduct’s “current and potential future effects.” Even though a company’s size and power may be relevant, the FTC clarified that this analysis does not require “a separate showing of market power or market definition.”
Examples of Unfair Methods of Competition
Although Commissioner Wilson’s Dissent criticizes the Policy Statement for failing to “provide clear guidance to businesses seeking to comply with the law,” the Policy Statement does set forth examples of conduct deemed unfair methods of competition that violate Section 5. While the list is not exhaustive, the selection of examples may give some insight into how the FTC may seek to use Section 5 in enforcement actions going forward.
|Violations of the Sherman Act and Clayton Act||This example appears to have been included to underscore that conduct found to violate the Sherman Act or Clayton Act will also violate Section 5.|
|Incipient violations of the antitrust laws||Consistent with the framing of Section 5 in the Policy Statement as a tool for pursuing “incipient threats to competitive conditions,” inclusion of this example signals that the FTC will pursue actions under Section 5 where the conduct at issue may be at an early stage and has not progressed to the point of posing an identifiable, direct threat to competition but merely has the potential to cause harm. This may include mere invitations to collude, and otherwise lawful joint ventures and other arrangements and exclusive contracts that may “ripen” into anticompetitive arrangements.|
|Conduct that Violates the Spirit of the Antitrust Laws||The Policy Statement provides several examples of conduct that falls within “gaps” of the existing antitrust laws or that poses “potential” harm.|
| ||The antitrust agencies have expressed concern regarding “roll-up” transactions, where a company (often a private equity firm) acquires several firms in the same product and geographic market, leading to greater consolidation. Because these strategies often involve serial transactions that individually may not present competitive issues, and often fall below the threshold above which a Hart-Scott-Rodino filing would be required, they often can elude regulation.|
| ||Recently, the FTC has focused on the effect of public statements or other public actions that could lead competing firms to engage in parallel conduct that harms competition without direct agreement. Because Section 5 allows enforcement without showing an agreement, it is a tool that may lend itself to targeting communications that merely create potential for coordination.|
| ||As noted above, because there is no requirement to show an actual agreement, Section 5 allows the FTC to pursue tacit or merely parallel exclusionary conduct (e.g., boycotts, refusals to deal) that, taken together, may harm competition.|
| ||The cases cited in connection with this “catch-all” example involve false and deceptive advertising and other conduct that violates Section 5.|
| ||This example signals a continued commitment to target standard-setting practices that exclude or frustrate competitors or inhibit new entry, a longstanding concern, and patent misuse conduct such as Walker Process fraudulent patent enforcement.|
| ||The Robinson-Patman Act allows the FTC to pursue price discrimination and related conduct where the technical requirements of the law are met and broad defenses are not present.|
| ||Inclusion of this example (like the “monopoly leveraging” example) suggests that Section 5 may be used to go after coercive tying and bundling where a company uses its presence in one market to induce customers to buy products in another market. Because this conduct is often cited as harming small businesses — which the Policy Statement aims to protect — the FTC may use Section 5 to challenge tying and bundling by larger competitors.|
| ||This example suggests that the FTC will use Section 5 to target transactions between established competitors and nascent competitors or companies with the potential to pivot or evolve to become competitors. The law in this area is unsettled, as seen in recent FTC merger challenges.|
| ||“Monopoly leveraging” is the practice described in this example. Traditionally, the conduct needs to result in a monopoly in the second market. As demonstrated in recent proposed antitrust reform legislation aimed at lowering the barriers to enforcement, there is some thought that “monopoly leveraging” should not require such a showing and this example may signal that the FTC is prepared to use Section 5 to target this conduct.|
| ||Also consistent with recent proposed antitrust reform legislation containing provisions that would eliminate the requirement to demonstrate a relevant market as a threshold element of a Sherman Act claim, the FTC appears poised to use Section 5 to target conduct without first engaging in the process of market definition.|
| ||The FTC apparently is looking to pursue enforcement actions targeting interlocking directorates beyond those that violate Section 8 of the Clayton Act, possibly including interlocking directorates that fall within an exception to Section 8.|
| ||Refusal-to-deal cases can be difficult to bring under the Sherman Act where there is a requirement to demonstrate that the action was taken with no legitimate business justification (e.g., termination of a profitable relationship where short-term profits are sacrificed to exclude a competitor). Actions pursued under Section 5 potentially could be brought under a more relaxed standard.|
| ||These examples may signal that the FTC will act against unilateral business conduct not within the traditional ambit of Section 2 of the Sherman Act but may nonetheless distort the competitive landscape and potentially harm competition.|
Defenses and Justifications
As noted, the Policy Statement abandons the rule-of-reason framework in favor of weighing these criteria using a “sliding scale.” Unlike under a rule-of-reason analysis, the FTC will not perform a cost-benefit analysis or look to net efficiencies. Instead, it will consider “a variety of non-quantifiable” harms and benefits as well as the “nature of the harm.” The more the conduct is “facially unfair,” the less the FTC says it needs to show a negative impact on competition and the less it needs to consider whether the conduct was justified. For conduct that is not facially unfair, the need for in-depth analysis and the role of defenses and justifications become more important.
Given these disparate qualitative considerations, it is hard to predict how the FTC will treat justifications for unfair conduct. As Commissioner Wilson worried in dissent, the new framework “approximates per se condemnation,” where the only inquiry is whether facially unlawful conduct occurred, not whether it had an anticompetitive effect or whether it had a legitimate business justification.
The Path Ahead
Though it attempts to redefine a key antitrust statute, the new Policy Statement has limited effect on its own. It does not, for instance, bind courts or the FTC’s administrative law judge to the FTC’s interpretation of “unfair methods of competition” under Section 5. Nor does it require courts to adhere to the FTC’s new framework for evaluating potential Section 5 violations. Parties may challenge whether Section 5 provides the FTC with the authority to bring enforcement actions in the areas outlined in the Policy Statement. Coincidentally, the FTC issued the Policy Statement days after the U.S. Supreme Court heard oral arguments in Axon Enterprise, Inc. v. FTC, a case that may chip away at the constitutionality of FTC administrative enforcement proceedings by allowing parties to challenge the FTC’s procedure in federal court before adjudication of an enforcement action.
Still, companies should take the new Policy Statement seriously. At the very least, it signals increased FTC enforcement of conduct that previously would not have attracted the attention of the antitrust agencies. An increase in enforcement actions, even if ultimately not successful, can prove costly for companies. While the FTC cannot obtain monetary remedies for first-time violations of Section 5, it can obtain onerous injunctive relief by restricting certain conduct or even blocking proposed transactions. Once companies are under consent decrees or otherwise put on notice that the FTC considers certain actions to be violations of Section 5, subsequent violations can result in civil penalties.
Given these consequences, companies should examine whether conduct complies with the FTC’s new policy. In particular, conduct that could be argued to fall within one of the categories in the chart above should be closely reviewed for antitrust risk.
If you have questions or wish to discuss strategies for managing Section 5 enforcement risk, please contact one of the authors or another member of McGuireWoods’ antitrust team: Angelo Russo, Brent Justus, Sarah Zielinski, Nick Giles and Amy Gilbert.