Unfair Methods of Competition Under Section 5 of the FTC Act: What is the Intelligible Principle?

Introduction

The Federal Trade Commission (FTC) Act and the Clayton Act supplemented the Sherman Act. The FTC Act added a new enforcer and a new prohibition—on “unfair methods of competition” (the UMC prohibition). Members of Congress appreciated that the Constitution did not permit the delegation of legislative power to a commission and acted on the belief that the indefinite UMC prohibition would pass constitutional muster and usefully guide both the FTC and the courts.

An indefinite prohibition does not unconstitutionally delegate if it conveys an “intelligible principle.” As Justice Elena Kagan explained, the “nondelegation inquiry always begins (and often almost ends) with statutory interpretation. The constitutional question is whether Congress has supplied an intelligible principle to guide the delegee’s use of discretion. So the answer requires construing the challenged statute to figure out what task it delegates and what instructions it provides.” The Supreme Court, however, never fully worked out the instructions for the UMC prohibition.

This article reviews the origins and legislative history of the FTC Act to glean the instructions Congress intended and identifies seven points on which members of Congress appear to have agreed. These seven points remain a useful starting point for interpreting the UMC prohibition. The review also identifies an overarching conceptual standard for deciding whether a practice or course of conduct violates the UMC prohibition, although agreement on this standard is less clear.

The UMC prohibition’s draftsman and its leading supporters in the Senate asserted an efficiency standard developed by economists: Efficiency-based competition on the merits was “fair,” while excluding rivals on a basis other than efficiency was “unfair.” Although consensus on this concept was not evident in the legislative history, no member of Congress expressed disagreement. This standard can be a critical limiting principle for the UMC prohibition.

This article also reviews jurisprudence on the UMC prohibition, which is less revealing than its origin story. Reasoning that the spirit of the Sherman Act animated the UMC prohibition, courts declared that it must reach all anticompetitive conduct. But development of the law stalled before the prohibition’s intelligible principle could crystallize. The Supreme Court last interpreted the UMC prohibition in 1972, and the last significant appellate decision was in 1984.

Drawing on antitrust developments over the past half-century, as well as all that came before, this article articulates four basic principles:

1. The UMC prohibition serves only to protect the competitive process.
2. The UMC prohibition does not interfere with competition on the merits.
3. The UMC prohibition protects only the public interest in competition.
4. The UMC prohibition reaches beyond the Sherman and Clayton Acts only to conduct that is anticompetitive on its face or has a reasonable probability of significantly harming competition.

This article also critiques the FTC’s November 10, 2022, policy statement on the UMC prohibition (FTC Policy Statement), which was meant “to assist the public, business community, and antitrust practitioners by laying out the key general principles that apply to whether business practices constitute unfair methods of competition under Section 5 of the FTC Act.” The FTC Policy Statement paints a misleading portrait of congressional intent and interprets the UMC prohibition in a manner at odds with the spirit of the Sherman Act.

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