In a recent policy statement, the Federal Trade Commission (FTC) sought to answer a question that has vexed antitrust practitioners, the judiciary, and the commission itself for over 100 years: What is the scope of the prohibition on “unfair methods of competition” in section 5 of the FTC Act? The scope of section 5 is broader than the other antitrust statutes, the Sherman and Clayton Acts. But the metes and bounds of section 5 have remained undefined.
The lack of clarity has left litigators in the lurch. The most recent cases involving section 5 claims challenging conduct beyond the scope of the other antitrust laws (so-called “stand-alone” claims) are at least 40 years old: E.I. DuPont De Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984); Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980); Official Airlines Guides, Inc. v. FTC, 730 F.2d 920 (2d Cir. 1980). Since then, all the stand-alone section 5 cases have been resolved by consent decree. After all, who wants the risk of litigating what one former commissioner called “shimmers” in the “penumbra” of section 5 or in a “sea of uncertainty,” as another called it?
On the other hand, the lack of clarity has paralyzed the commission. Without consensus on the meaning of “unfair methods of competition,” the commission has been cautious to go beyond the well-defined bounds of the Sherman and Clayton Acts. As one former commissioner wrote in 2014, this “absence of meaningful guidance” resulted in an “uninspiring, if not bleak” record of “unfair-methods-of-competition enforcement.”
To address this uncertainty, the commission issued a short policy statement in 2015. The statement affirmed that section 5 enforcement would be “guided by the goal of promoting consumer welfare” and that the commission would rely on the “rule of reason” framework developed under the antitrust laws and under which a court examines both the pro-competitive and harmful aspects of alleged anticompetitive conduct to determine whether it violates federal antitrust law.
At the time, the 2015 policy statement was relatively uncontroversial. One commissioner dissented, arguing that the statement failed to sufficiently constrain the scope of the unfair methods of competition. But the statement was largely consistent with a “broad consensus” (as noted in the 2014 article referenced above) that unfair methods include only conduct that “harms or is likely to harm competition,” that section 5 should not cover conduct that “merely injures small business, violates public morals, or otherwise contravenes public policy based upon some set of non-economic considerations,” and that “the FTC must consider efficiencies justifications” in determining whether conduct is an unfair method.
So much for consensus. In 2021, a new set of commissioners withdrew the 2015 policy statement, contending that the statement “contravenes the text, structure, and history of Section 5” and that “by subjecting Section 5 to a framework similar to the rule of reason, the Commission hamstrings its enforcement mission.” Indeed, the current chair of the commission has argued against the consensus underlying the 2015 statement, asserting that the antitrust laws should not be focused on promoting consumer welfare, should not consider efficiencies, and should consider other noneconomic considerations.
In November 2022, the commission issued a new policy statement “intended 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.” But there’s obviously a lot more going on here. The statement is an outright rejection of prior commission guidance and an unabashed effort to advance an expansive view of the commission’s powers.
The controversial nature of the new policy statement was encapsulated by the dissenting commissioner. According to her, the statement “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful” and “adopts an ‘I know it when I see it’ approach premised on a list of nefarious-sounding adjectives, many of which have no antitrust or economic meaning.” If this is right, the new policy statement does not clarify the scope of section 5; it merely obviates what few bounds the commission had sought to set up in 2015.
What’s a litigator to do? One useful exercise is to compare the 2015 and 2022 policy statements for clues about where the battlegrounds lie over “unfair methods of competition.”
The 2015 policy statement was succinct. The heart of it consisted of only three bullet points:
In deciding whether to challenge an act or practice as an unfair method of competition in violation of Section 5 on a standalone basis, the Commission adheres to the following principles:
One commissioner sought to elucidate these principles. First, unfair methods of competition “must result in, or likely result in, significant harm to competition as that term is understood under the traditional federal antitrust laws.” “Harm to competition” does not “consider non‐economic factors, such as whether the practice harms small business or whether it violates public morals.” Rather, the commission would apply “the economic concept of harm to competition,” “a concept that has long been deeply embedded into antitrust jurisprudence,” which would provide “guidance to the business community” and comport “with recent judicial guidance.”
Under the 2015 policy statement, the commission thus adopted the familiar rule-of-reason test articulated by the Supreme Court for the Sherman Act:
[t]he true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition,” and that such analysis requires the court to “consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable.
The policy statement recognized, however, that the “Commission may prosecute as unfair methods of competition those practices that have not yet resulted in harm to competition but are likely to result in anticompetitive effects if allowed to continue.” When challenging conduct as likely to harm competition, the commission would assess “both the magnitude and probability of competitive harm. Where the probability of competitive harm is smaller, the Commission will not find an unfair method of competition without reason to believe the act or practice poses a risk of substantial harm.”
Second, unfair methods of competition “must not generate cognizable efficiencies.” To avoid deterring efficiency-enhancing conduct, the burden is on the commission to show “that the act or practice lacks cognizable efficiencies.”
It’s no exaggeration to say that the 2022 policy statement marks a complete reversal of the direction set out by the 2015 statement. Making the commission’s intentions clear, the new statement immediately rejects the rule of reason. Relying entirely on statements in the legislative history, the policy asserts that Congress enacted the FTC Act “to push back against the judiciary’s adoption and use of the open-ended rule of reason for analyzing Sherman Act claims,” for fear the rule would “deliver inconsistent and unpredictable results and ‘substitute the court in the place of Congress.’”
Of course, the rule of reason referenced in the legislative debates has been refined by the courts over the last 100 years. Although the broad contours remain, modern courts deciding rule-of-reason cases insist on sophisticated economic analyses unheard of in 1914. Thus, the rule of reason referenced in the 2015 policy statement has little resemblance to the rule discussed by Congress in 1914. But out it goes, according to the new commission.
Out too goes harm to competition. According to the 2015 statement, “[a]s with the Sherman Act, conduct challenged under Section 5 must have an ‘anticompetitive effect.’” That is, “detrimental effects on competition, such as reduced output, increased prices, or decreased quality in the relevant market.”
Not so under section 5, according to the 2022 statement. According to the new statement, “‘unfair methods of competition’ need not require a showing of current anticompetitive harm or anticompetitive intent.” Now the commission says section 5 is violated by any conduct that “goes beyond competition on the merits.”
To be clear, the term “competition on the merits” has a long history in antitrust jurisprudence. In monopolization cases, the Supreme Court has held that conduct is “exclusionary” if it “not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way.” In other words, anticompetitive conduct goes beyond competition on the merits because it excludes rivals on some basis other than efficiency. But to violate the Sherman Act, exclusionary conduct alone is not enough. The defendant must also have market power.
The commission’s new policy statement, however, avoids the concept of efficiency and jettisons any need to show market power. Instead, the statement says that section 5 is violated by (1) any conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature” or “otherwise restrictive or exclusionary” that (2) tends to “negatively affect competitive conditions.”
These two elements are “are weighed according to a sliding scale.” “Where the indicia of unfairness are clear, less may be necessary to show a tendency to negatively affect competitive conditions. Even when conduct is not facially unfair, it may violate Section 5.”
Clear? Not really. The problem is that while some of the terms used by the statement, such as “exclusionary,” have been defined over the years in terms of economic efficiency, most the adjectives—even those few repeated by the courts—are particularly ambiguous. What is “exploitative” or “abusive” conduct in the context of competing businesses? We may have some sense of what those terms mean in the context of employment relationships, but not in the world of competition.
And what does it mean to “negatively affect competitive conditions”? Apparently, it does not mean that the conduct causes anticompetitive effects; the commission made that clear. The statement tells us that there is no need for the commission to show “actual harm” and all that is a needed is a “tendency” to cause harm.
Does it mean conduct that merely harms rivals? Apparently. An appellate court recently observed that “antitrust policy has wisely shifted from protection of competition as a process of rivalry to the protection of competition as a means of promoting economic efficiency.” But the new policy statement relies on legislative statements that “one of the main objects of this legislation is to prevent a rival in business from using unfair competition to drive his competitor out of business,” and “it is not required to show restraint of trade or monopoly, but that the acts complained of hinder the business of another.”
Moreover, the 2015 policy statement adopted a consumer welfare standard, which—as courts have stated—is “indifferent to the preservation of inefficient competitors” and focuses on whether the conduct allocates “economic resources” to “their best use” so that “consumers are assured competitive price and quality.” But the new policy statement refers to conduct with a tendency to affect “consumers, workers, or other market participants.” According to the new statement, section 5 was intended to “protect a broad array of market participants including workers and rival businesses.” Thus, the commission now seems to believe that the purpose of section 5 is to “‘protect the smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals.’”
In contrast to the 2015 statement, which put the burden on the commission to show a lack of cognizable efficiencies, the 2022 statement puts the burden squarely on the respondent. Efficiency justifications are now deemed an “affirmative defense,” and the respondent must “show that the asserted justification for the conduct is legally cognizable, non-pretextual, and that any restriction used to bring about the benefit is narrowly tailored to limit any adverse impact on competitive conditions.”
Thus, when determining whether conduct is “coercive, exploitative, collusive, [or] abusive,” the commission apparently will not consider whether the challenged conduct is economically efficient. Instead, based on unspecified factors, the commission will label the conduct “exploitative,” and the respondent must bear the burden of demonstrating it is economically efficient.
The 2022 policy statement ends with a list of examples of conduct that may be considered unfair methods of competition. Included in the list are once-novel antitrust theories that were either rejected by the courts or sank into the shadows of antitrust history.
For instance, the list seeks to resurrect long-forgotten theories aimed at oligopolistic interdependence. Among them are “practices that facilitate tacit coordination.” This, however, was the theory behind the commission’s ill-fated attempts to impose section 5 liability for independent conduct by firms in oligopolistic industries. The new policy statement also would condemn “parallel exclusionary conduct that may cause aggregate harm,” which would condemn parallel but independent conduct. But as the Supreme Court has recognized, parallel conduct in oligopolistic industries is “in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.”
The list also brings back other theories, such as leveraging: “using market power in one market to gain a competitive advantage in an adjacent market.” But the Supreme Court rejected this theory, holding that leveraging power to gain a “competitive advantage” is not enough to violate the antitrust laws; leveraging is unlawful only if the firm dangerously threatens to monopolize the adjacent market.
In rejecting one of the commission’s section 5 frolics, the Second Circuit insisted that “the Commission owes a duty to define the conditions under which conduct . . . would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.” By this standard, the new policy statement fails miserably.
Litigators, gear up. Your only hope is that the courts, as they have done in the past, will rein in the commission.
