United States: The FTC's Historic Attempt To Drive A Mack Truck Through The Sherman Act

On Nov. 10, the FTC issued a statement regarding the scope of unfair methods of competition under Section 5 of the Federal Trade Commission Act, purporting to clarify its new enforcement criteria for Section 5 cases.

The Federal Trade Commission announced in 2021 that it was repudiating its former enforcement regime under which it used the rule of reason, guided by the goal of promoting consumer welfare, to evaluate actions brought under Section 5 of the Federal Trade Commission Act. On Nov. 10, the FTC issued a statement regarding the scope of unfair methods of competition under Section 5 of the Federal Trade Commission Act, purporting to clarify its new enforcement criteria for Section 5 cases. The historic statement, however, creates significant uncertainty for businesses seeking to predict what conduct will be deemed by the FTC to run afoul of Section 5 and what analytical structure the FTC will use to make those determinations.

Background

Congress passed the FTCA in 1914 to supplement the Sherman and Clayton Acts. Section 5 allows the FTC to investigate and prosecute, among other things, "unfair methods of competition," which includes a broader range of conduct than the conduct prohibited by the Sherman and Clayton Acts, such as "incipient violations of those statutes" and "conduct which ... is a close violation or is contrary to their spirit." Unlike criminal prosecutions and private civil actions for treble damages under the Sherman, Clayton and Robinson-Patman Acts, however, claims under Section 5 of the FTCA can be brought only by the FTC in an administrative proceeding and can seek only injunctive relief (if awarded by a federal court in a subsequent action).

In August 2015, the FTC explained that in Section 5 actions alleging conduct "that fall outside the scope of the Sherman and Clayton Acts," the FTC is "guided by the public policy underlying the other antitrust laws, namely, the promotion of consumer welfare," and applies "a framework similar to the rule of reason." The rule of reason was developed over time by courts in Sherman and Clayton Act cases and allows consideration of all the circumstances—including actual or likely harm to competition, market power, market definition and efficiency justifications—when deciding whether a defendant's particular conduct is actually anticompetitive and thus illegal.

Application of the rule of reason to determine whether conduct is an "unfair method of competition" is in line with the FTC's decades-long practice of prosecuting and adjudicating Section 5 actions on "a flexible case-by-case basis." The FTC also confirmed that it would continue to rely "on the Sherman and Clayton Acts as its primary enforcement tools."

In July 2021, however, the FTC stated that it would no longer apply that framework. Instead, it proclaimed that it would more aggressively "identify and combat unfair methods of competition [under Section 5] even if they do not violate a separate antitrust statute" and would "consider whether to issue new guidance or to propose rules that will further clarify the types of practices that warrant scrutiny under this provision." In its recent statement, the FTC described "the most significant general principles" that will guide its interpretation of Section 5 going forward.

Analysis

To violate Section 5 under these new "principles," according to the FTC, conduct must be "a method of competition" that is "unfair, meaning that the conduct goes beyond competition on the merits." The FTC vaguely explained that whether conduct "goes beyond competition on the merits" depends on whether it is "coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature;" and "tends to negatively affect competitive conditions." Significantly, however, these amorphous factors will be assessed on a "sliding scale," such that "when the indicia of unfairness are clear, less may be necessary to show a tendency to negatively affect competitive conditions."

The lone dissenting commissioner, Christine S. Wilson, warned that the FTC's new approach replaces case-by-case adjudications that employ the well-understood structure of the rule of reason fleshed out by 125 years of case law under the Sherman Act and consider the anticompetitive impact of the conduct, in favor of a "quick look analysis that approximates per se condemnation." Specifically, Wilson noted that as to the first factor, the "statement provides no content for the list of adjectives that may signal the presence of 'unfair' methods of competition" and thus provides no guidance to businesses. Moreover, Wilson argued that the FTC's sliding-scale approach could allow conduct to be condemned merely because it is "facially unfair" under the first factor or merely has a "tendency" to affect competition under the second, with no analysis of market conditions, market power, or actual or likely anticompetitive effects. Significantly, Wilson also noted that the FTC "hedged" on whether and when businesses would be permitted to present evidence of legitimate efficiency and procompetitive effects that could justify conduct that is found "facially unfair." And, even where the FTC does consider anticompetitive effects and procompetitive justifications under the second factor, its statement indicates that it will consider not only the interests of consumers—the central tenant of antitrust law for the last 50 years—but also "labor, competitive rivals, and unnamed others." In short, Wilson fears that the FTC's new shotgun approach is based on poorly defined criteria that have little or nothing to do with whether the conduct actually or likely inhibits competition to the detriment of consumers, and will give the FTC "the authority to summarily condemn essentially any business conduct it finds distasteful," whether illegal or not under the Sherman, Clayton, or RobinsonPatman Acts.

The "general principles" set out in the FTC's historic statement unfortunately raise more questions than they answer. It is clear that the FTC intends (and in some cases has already begun) to investigate large swaths of purportedly undesirable conduct that previously did not fall under Section 5 or any other existing federal or state antitrust law. But the FTC provided only a "non-exhaustive" list of conduct that it believes constitute "incipient violations" or "violat[ions] of the spirit of the antitrust laws" under Section 5. It remains to be seen what other conduct the FTC will decide falls under these umbrella phrases, how exactly the FTC will apply its new framework, and what violations the courts (used to a more honed analysis under other antitrust laws) will uphold on review. Stay tuned.

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