FTC Issues New Policy Statement on “Rigorous Enforcement” Against Unfair Methods of Competition

One of the longest running controversies in antitrust enforcement policy concerns the breadth of the Federal Trade Commission’s authority to define and prohibit “unfair methods of competition” under Section 5 of the FTC Act.  In April of this year, the new Commission majority withdrew the brief Statement of Enforcement Principles issued in 2015, asserting that the earlier Statement imposed unwarranted constraints on the Commission’s authority and promising new guidance.  That guidance was issued last week and portends a significantly more expansive approach to FTC antitrust enforcement on a wide range of conduct, including exclusive contracts, refusals to deal, bundling, price discrimination, and serial acquisitions.

The new Policy Statement is an effort by the Biden FTC to give notice to the business community of its intentions with respect to both its enforcement and asserted rulemaking authority, and will likely serve as the foundation of the Commission’s policy agenda going forward.  It reaffirms the uncontroversial proposition that “unfair methods of competition” extends beyond the boundaries of the Sherman and Clayton Acts, but has stirred controversy in its approach to defining exactly how far beyond.  As is more fully explained below, it defines unfair methods of competition broadly, seeks to reduce the FTC’s burden of proving offenses under Section 5, and limits the opportunities for parties to justify their conduct.  The test of this new guidance, however, will come when the Commission chooses to use these principles to bring individual enforcement actions or to promulgate competition rules.

Background

Section 5(a) of the FTC Act, 15 U.S.C. § 45(a)(1), prohibits “unfair methods of competition” and empowers the agency to pursue a cease and desist order through an administrative proceeding or seek an injunction in federal district court.  The statute, however, does not define “unfair methods of competition,” which has led to debate regarding the scope and extent of that authority.  In 2015, the FTC approved on a bipartisan basis a “Statement of Enforcement Principles,” which provided a framework for how the agency enforces this provision.  According to that statement, the FTC would decide whether to bring an action for a Section 5 violation using a burden-shifting framework similar to the “rule of reason” analysis that courts apply when evaluating most claims under the Sherman and Clayton Acts.  Under this framework, the action at issue must “cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”

In 2021, shortly after Lina Khan became Chair, the FTC on a 3-2 vote rescinded that 2015 statement. Chair Khan remarked at the time that the action was “only the start of [the FTC’s] efforts to clarify Section 5.”  The new Policy Statement appears to be the next step in that process.  However, defining the ultimate scope of the broad statutory language must await both the FTC’s subsequent decisions on what antitrust cases to bring under these new principles and how those cases fare in the courts.  

The FTC’s New Interpretation of “Unfair Methods of Competition”

The new Policy Statement declares that “Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.”  While this general proposition has long been accepted, the Policy Statement details the background and legislative history of Section 5, enacted in 1914, indicating that Congress intended the FTC to challenge conduct beyond that prohibited by the Sherman Act.  The Policy Statement also relies on a dozen Supreme Court cases dating from 1934 to 1986 holding that Section 5 may be interpreted flexibly to address practices beyond those within the scope of the Sherman and Clayton Acts that negatively affect competitive conditions. Its focus, therefore, is on what has been labelled “stand-alone” Section 5 offenses.

Seeking to break new ground, however, the Policy Statement concludes that the “FTC Act’s legislative history makes it clear that Congress intended the statute to protect a broad array of market participants including workers and rival businesses.”  In addition, the new Policy Statement declares that Section 5 can reach any conduct that may “tend to negatively affect competitive conditions,” and that in order to stop monopolies in their “incipiency,” Congress intended that “ʻunfair methods of competition’ need not require a showing of current anticompetitive harm or anticompetitive intent,” nor the market definition/market power evidence typically required in Sherman Act cases.  Also important is the Statement’s omission of any mention of either “consumer welfare” or “efficiency.”

The Policy Statement provides the following “significant general principles” the FTC will employ when defining acts that constitute unfair methods of competition:

1. The conduct must be a method of competition. The Policy Statement defines a “method of competition” as conduct “undertaken by an actor in the marketplace—as opposed to merely a condition of the marketplace,” which implicates competition—either directly or indirectly. This includes “misuse of the regulatory process that can create or exploit impediments to competition (such as those related to licensing, patents, or standard setting).”
2. The conduct must be unfair. The FTC will deem conduct unfair if it “goes beyond competition on the merits.”  There are two criteria to consider when evaluating this standard.
   • First, is the action “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature”?
   • Second, does the action “tend to negatively affect competitive conditions —whether by affecting consumers, workers, or other market participants”?  Because a showing of “actual” harm to competition is not required under the Policy Statement framework, the second condition is focused on whether the conduct “has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.”

The Policy Statement indicates that the FTC will weigh the two criteria on a “sliding scale.”  If there is substantial evidence of unfairness, less evidence may be needed to demonstrate the negative impact on competitive conditions.  In addition, the Policy Statement provides that, even if the conduct at issue is not “facially unfair,” it may still violate Section 5.

With respect to business justifications, the Policy Statement indicates the FTC will not give any consideration to business justifications for “facially unfair” conduct, creating a potentially “per se unfair” offense akin to per se unreasonable offenses under Section 1 of the Sherman Act.  For other types of unfair conduct, the Policy Statement describes the type of balancing the Commission will undertake given the nature of the justifications and potential harms.  The Policy Statement further indicates that it will place the burden on the party or parties asserting the justification to show that it is legally cognizable, non-pretextual, and that the conduct is narrowly tailored to limit adverse impact on competitive conditions.  Importantly, it notes that this burden may be easier to carry if the justifications are reflected in ordinary course documents that predate or are contemporaneous with the conduct at issue.

The Policy Statement concludes by listing “historical examples” of unfair methods of competition that may constitute an incipient violation of the antitrust laws or violate the “spirit” of the antitrust laws.  Many of the examples include conduct that has not been challenged as a stand-alone Section 5 violation in many decades, if ever, including:  a series of mergers that do not individually violate the antitrust laws; loyalty rebates, bundling, and exclusive practices that may ripen into violations of the antitrust laws; price discrimination; parallel exclusionary conduct that may cause aggregate harm; practices that leverage market power in one market to impede competition in another market; interlocking directorates; and discriminatory refusals to deal.

Dissenting Statement of Commissioner Wilson

In a lengthy dissent, Commissioner Wilson argues that, “instead of providing meaningful guidance to businesses, the Policy Statement announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.”  She asserts that the Policy Statement “abandons bedrock principles of antitrust” such as the rule of reason framework, the consumer welfare standard, and the “vast body of relevant 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 from a practical and procedural standpoint, Commissioner Wilson expresses concern that the Policy Statement does not provide clear guidance to businesses seeking to comply with the law, and should have been issued for public comment prior to its adoption, particularly given her view that it represents a “radical departure from the Commission’s recent enforcement efforts, and a dramatic expansion of the agency’s purported authority.” 

Practical Implications

The 2022 Policy Statement sets the stage for the Commission to decide how to employ these new principles in bringing enforcement actions and/or seeking to adopt competition rules. And it will almost certainly lead to opportunities for courts to decide if they agree with the interpretation of the Commission’s authority as set forth in the Policy Statement.

The Policy Statement has already sparked public reaction on both sides. Pro-enforcement groups have applauded the effort, while business organizations have raised concerns, including whether the Policy Statement provides sufficient guidance to companies as to where the new boundaries are in terms of compliance with the FTC Act.  Clearer guidance may come from individual enforcement actions or new FTC rules, but not before what are likely lengthy and costly investigations and/or rulemaking proceedings, and subsequent judicial review.  In the interim, individual companies must decide whether it is prudent to review business practices long thought to be permissible under the Sherman and Clayton Acts, together with contemporaneous documents, in an effort to avoid FTC scrutiny.

More broadly, although it is certainly not unusual for different administrations to have different views about antitrust enforcement and even about the meaning of certain statutory language, in the current legal and political environment, the new Policy Statement is likely to keep the FTC in the spotlight.  It may well amplify the ongoing debate about core antitrust principles, such as the consumer welfare standard.  And it may even play a role in the Supreme Court review of agency authority and Congressional consideration of antitrust law amendments.

Crowell & Moring will continue to follow and update these and related developments. Please contact us if you have any questions or would like to know more about the implications of the FTC’s statement.