FTC Issues New Policy Statement on Enforcement of “Unfair Competition Methods” Under Section 5 of the FTC Act | Foley & Lardner LLP

As part of the Biden administration’s ongoing efforts to reinvigorate antitrust enforcement and the promotion of competition, on November 10, 2022, the Federal Trade Commission (FTC) issued a new “Policy Statement Regarding the Scope of unfair methods of competition under Section 5 of the Federal Trade Commission Act” (the Policy Statement). The policy statement significantly expands the scope of what the FTC considers “methods of unfair competition” prohibited under Section 5 of the Federal Trade Commission Act, 15 USC § 45 (Section 5). In particular, the policy statement considers Section 5 to affect methods of competition that are unfair and restrictive, even if the conduct does not otherwise violate Sherman or Clayton laws (together, the antitrust laws) and even if the conduct does not actually harm competition or harm consumers.

Background

Adopted in 1914, Section 5 prohibits, among other things, “unfair methods of competition”. For more than a century, the FTC has applied this broadly worded law on a case-by-case basis, without any policy statement on the meaning of the term “unfair methods of competition.” That changed in 2015, when a bipartisan panel of commissioners adopted a simple one-page policy statement (the Advance Statement) to guide the FTC’s enforcement of its “unfair competitive practices” powers in under Section 5. First, the prior statement stated that the FTC would be “guided by the public policy underlying the antitrust laws, which is the promotion of consumer welfare.” Second, the advance statement said the FTC would evaluate the conduct “within a framework similar to the rule of reason,” considering whether a particular conduct is likely to harm competition by weighing the conduct’s potential benefits against its harms. potentials. Finally, the prior statement said the FTC would be “less likely” to challenge an act or practice under Section 5 on a “stand-alone” basis if the act or practice could be sufficiently challenged under antitrust laws. .

One of the first policy actions taken by the FTC under Chairman Lina Kahn was to rescind the Advance Statement, in July 2021. Chairman Khan wrote at the time that the Advance Statement had “repealed[d] the obligation imposed by Congress on the Commission to use its expertise to identify and combat methods of unfair competition even if they do not violate a separate antitrust law. Chairman Khan added that the FTC would “consider whether to issue new guidance or propose rules that will further clarify the types of practices that warrant scrutiny” under Section 5. November 10, 2022 seems to be the culmination of this latest effort. .

The policy statement

The policy statement describes “key principles of general application” that the FTC will use in the future to assess whether a behavior is an actionable “method of unfair competition.”

Competition methods

The policy statement defines a method of competition as “conduct undertaken by a participant in the market — as opposed to a mere condition of the market, not on the part of the respondent, such as high concentration or barriers to ‘hall “. The behavior must involve competition in some way, but the relationship can be direct or indirect. For example, the Policy Statement explains that the misuse of regulatory processes to create barriers to competition (which may relate to licensing, patents or standard setting) can be a method of competition. On the other hand, general legal violations, such as violations of environmental or tax laws that simply give a company a cost advantage over its competitors, are unlikely to be considered a method of competition in under section 5.

Injustice

The policy statement defines “unfair” as conduct that “goes beyond competition based on the merits”. Competing on the merits may include, for example, having “superior products or services, superior business acumen, truthful marketing and advertising practices, investments in research and development that lead to innovative results, or attract employees through better employment conditions”.

To assess whether a conduct goes beyond competition on its merits, the policy statement outlines two key elements. First, a behavior can be qualified as “unfair” if it is “coercive, exploitative, collusive, abusive, deceptive, predatory”, “involves[s] the use of economic power of a similar nature”, or is “otherwise restrictive or exclusive”. Second, the behavior “must tend to adversely affect the conditions of competition”. Examples include conduct that “tends to deny or obstruct opportunities for market participants, reduce competition among rivals, limit choice, or harm consumers.”

Under the policy statement, the FTC will assess both of these on a sliding scale. If the FTC considers the conduct to be clearly unfair, then the tendency to adversely affect the conditions of competition may be weaker or incipient, but the conduct may still warrant application of Section 5. Similarly, even if the indicia of unfairness are unclear, a strong demonstration of adverse effects on the conditions of competition may be sufficient to justify the application of Article 5.

The policy statement also states that behavior that is not “facially unfair” may still violate Section 5. In these cases, the FTC may consider the size and market power of the party and the purpose of the behavior as more relevant to the FTC’s assessment as whether the behavior tends to adversely affect the conditions of competition.

The policy statement also advises that because Section 5 focuses on “incipient” threats to the conditions of competition, actual harm may not always be necessary to justify enforcement. This means that the FTC can challenge conduct that has not yet caused actual harm. According to the policy statement, the FTC may focus on whether the behavior tends to generate negative consequences such as price increases, production or quality reductions, innovation reductions, or reduced the likelihood of competition. The policy statement is explicit that “the investigation will not focus on ‘rule of reason’ investigations more common in Sherman Act cases, but will instead focus on stopping the methods of unfair competition at their inception because of their tendency to harm the conditions of competition.”

Finally, the policy statement recognizes that the affirmative defenses At first glance Violations of Article 5 may exist, but express skepticism as to their applicability. The policy statement outright rejects any attempt to defend allegedly unfair conduct based on traditional “cost-benefit analysis” that focuses only on quantifiable measures. Regardless, the policy statement indicates that the onus is on the respondent to establish that any affirmative defense is legally recognizable, non-pretext, narrowly tailored, and that the advantages outweigh the disadvantages, both quantitatively and qualitatively.

Examples of Unfair Competition Methods

The policy statement includes 20 non-exhaustive categories of conduct that the FTC may consider a “method of unfair competition” under Section 5. Without repeating the list in its entirety, a few illustrative examples of conduct that the FTC considers “nascent violations” or violate the “spirit” of antitrust laws are:

• Invitations to agree;
• Practices facilitating tacit coordination;
• A series of mergers, acquisitions, or joint ventures that, while not on their own meeting the Clayton Act’s “substantially lessening competition” standard, have an overall unfair effect;
• Loyalty discounts, tying, bundling, or exclusivity agreements that tend to escalate into violations of Sherman and Clayton laws due to industry conditions or a company’s position within the industry; and
• Nested directions not covered by the literal language of Clayton’s Law.

Dissent

FTC Commissioner Christine Wilson voted against the policy statement. In doing so, she posted a lengthy dissent claiming that the policy statement allows the FTC to summarily condemn “any business conduct it finds objectionable” and calls the new normal that of “I know it when I see it.” According to his dissent, the use of adjectives like “coercive”, “exploitative” and “restrictive” are subject to subjective interpretation and lack “established antitrust or economic meaning”. His dissent also argues that by eschewing the consumer welfare standard for a more open-ended approach that takes into account interests such as those of labor and “inefficient competitors”, the application of Article 5 can go to runs counter to the principle that antitrust laws favor “competition, not competitors” and can become “subject to the whims and political agendas of sitting commissioners”.

Key points to remember

The policy statement is a deliberate decision to expand the FTC’s enforcement authority to bring a wider range of conduct into the FTC’s sights. Ultimately, the courts will decide whether the policy statement reflects a proper interpretation of the FTC’s authority under Section 5. At this point, however, companies must assess their conduct through the prism advocated by the FTC in the policy statement. Among other things, companies can consider some of the following steps:

• Review and develop antitrust training for employees to ensure that the training educates employees on the risks in this area;
• Perform compliance reviews or audits of high-risk areas of the business for potentially anti-competitive or “unfair” conduct; and
• Confirm that all applicable standards bodies have rules that protect against fraudulent or unfair participant behavior.

Above all, companies should heed the FTC’s guidance that Section 5 does not prohibit good faith competition on the merits. Therefore, companies must strive to be competitive through “superior products or services, superior business acumen, truthful marketing and advertising practices, investments in research and development that lead to innovative results or by attracting employees through better employment conditions”.

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