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The FTC Expands Scope Of Unfair Methods Of Competition Enforcement – Antitrust, EU Competition

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The Federal Trade Commission (“FTC” or “the
agency”) announced a new enforcement policy1 for
the prohibition of unfair methods of competition under Section 5 of
the FTC Act.2 The FTC’s policy statement declares
that the FTC will take an expansive view of its power under the FTC
Act to investigate and prevent conduct that violates Section 5. The
FTC’s stated goal is to stop “unfair methods of
competition in their incipiency based on their tendency to harm
competitive conditions” and identify and police conduct that
may fall beyond the reach of other antitrust laws. While the FTC
has attempted to provide a framework to determine what constitutes
an unfair method of competition, its guidance may leave businesses
uncertain of what conduct runs afoul of Section 5.

I. Background

The FTC’s enforcement of Section 5 has engendered much
debate over many decades, with several policy adjustments by the
agency. In the 1960s and 1970s, the FTC applied Section 5 broadly
to challenge conduct on public policy grounds and suffered several
court reversals.3 But subsequent criticism led the
agency to adopt a more conservative approach to Section 5. In 2015,
the FTC announced a policy statement providing that, when deciding
whether to challenge conduct under Section 5 on a standalone basis,
the FTC would evaluate the conduct under a “framework similar
to the rule of reason,” consider business efficiencies and
justifications, and be guided by the consumer welfare
standard.4 In July 2021, the agency rescinded the 2015
policy statement, stating that it was “short-sighted” and
constrained the agency’s authority, counter to its statutory
obligations.5 The FTC’s November 2022 statement,
supported by three commissioners and opposed by one – is cast
as an attempt to remedy analytical gaps, citing Section 5’s
text, legislative history, and case law to support the revised
approach.

II. Guidance

On November 10, 2022, the FTC affirmed its intention to
vigorously enforce Section 5 of the FTC Act. The FTC stated that
Section 5 reaches beyond other antitrust laws and prohibits conduct
that tends to negatively affect competition, including
“incipient” violations and violations of the
“spirit” of the antitrust laws. According to the FTC,
conduct constitutes an unfair method of competition if (1) the
conduct is “a method of competition” and (2) is
“unfair.” The FTC stated that conduct is a method of
competition when it is undertaken by an individual or business in
the marketplace and implicates competition, either directly or
indirectly.6

The FTC may view a method of competition as unfair when the
conduct goes beyond competition on the merits.7 Two key
criteria are relevant:

  • First, the conduct may be coercive, exploitative, collusive,
    abusive, deceptive, predatory, or involve the use of economic power
    of a similar nature.

  • Second, the conduct must tend to negatively affect competition,
    such as conduct tending to foreclose or impair opportunities to
    market participants, limit choice, or harm consumers.8
    According to the FTC, Section 5 is focused on incipient threats to
    competition, not whether conduct directly caused actual, specific
    harm, and thus the test analyzes whether the conduct has a tendency
    to negatively affect competitive conditions, including when
    examined in the aggregate with actions of other market participants
    or as part of a cumulative effect of a business’s other market
    practices.

The two criteria are weighed on a sliding scale. For example,
even when the conduct is not facially unfair under (1), it may
still violate Section 5 by tending to negatively affect competitive
conditions under (2). Relevant factors include the size, power, and
purpose of the business and the current and potential future
effects of the conduct. Notably, in sharp contrast to the FTC’s
prior policy,9 the test does not require a showing of
market power or market definition or a rule of reason analysis.
According to the dissenting commissioner’s statement, the FTC
has adopted an “‘I know it when I see it’ approach
premised on a list of nefarious-sounding
adjectives.”10

III. Possible Justifications

The FTC cautions that justifications might not be considered in
a standalone action, as Section 5 liability normally attaches to
conduct prima facie. But where a party chooses to assert a
justification, the FTC will not conduct a net efficiencies test or
numerical cost-benefit analysis, and the more facially unfair and
injurious the harm, the less likely it can be overcome by
countervailing justifications.

Additionally, it is the party’s burden to show that the
asserted justification for the conduct is not pretextual, and that
any restriction used to bring about the benefit is narrowly
tailored to limit any adverse impact on competitive conditions. The
asserted benefits must not be outside the market where the harm
occurs. Finally, it is the party’s burden to show that, given
all the circumstances, the asserted benefits outweigh the harm and
are of the kind that courts have recognized as cognizable in
standalone Section 5 cases.

IV. Historical Examples of Unfair Methods of Competition

The FTC has provided a non-exhaustive list of historical
examples of unfair methods of competition. This list is meant to
provide guidance on the types of conduct that may violate Section 5
and includes:

  • Practices deemed to violate the antitrust laws;

  • Conduct deemed to be an incipient violation of the antitrust
    laws.11 Past examples of such use of Section 5
    include:

    • invitations to collude,

    • mergers, acquisitions, or joint ventures that have the tendency
      to ripen into violations of the antitrust laws,

    • a series of mergers, acquisitions, or joint ventures that tend
      to bring about the harms that the antitrust laws were designed to
      prevent, but individually may not have violated the antitrust laws,
      and

    • loyalty rebates, tying, bundling, and exclusive dealing
      arrangements that have the tendency to ripen into violations of the
      antitrust laws by virtue of industry conditions and the
      business’s position within the industry.


  • Conduct that violates the spirit of the antitrust
    laws.12 Examples of such violations, to the extent not
    covered by the antitrust laws, include:

    • practices that facilitate tacit coordination,

    • parallel exclusionary conduct that may cause aggregate
      harm,

    • conduct by a business that is undertaken with other acts and
      practices that cumulatively may tend to undermine competitive
      conditions in the market,

    • fraudulent and inequitable practices that undermine the
      standard-setting process or that interfere with the Patent
      Office’s full examination of patent applications,

    • price discrimination claims such as knowingly inducing and
      receiving disproportionate promotional allowances against buyers
      not covered by Clayton Act,

    • de facto tying, bundling, exclusive dealing, or loyalty rebates
      that use market power in one market to entrench that power or
      impede competition in the same or a related market,

    • mergers or acquisitions of a potential or nascent competitor
      that may tend to lessen current or future competition,

    • using market power in one market to gain a competitive
      advantage in an adjacent market by, for example, utilizing
      technological incompatibilities to negatively impact competition in
      adjacent markets,

    • conduct resulting in direct evidence of harm, or likely harm to
      competition, that does not rely upon market definition,

    • interlocking directors and officers of competing firms not
      covered by the literal language of the Clayton Act,

    • commercial bribery and corporate espionage that tends to create
      or maintain market power,

    • false or deceptive advertising or marketing which tends to
      create or maintain market power, or

    • discriminatory refusals to deal which tend to create or
      maintain market power.

V. Conclusion

The FTC’s policy statement departs from the recent
understanding of Section 5 of the FTC Act. Although the FTC’s
published guidance attempts to describe the application of Section
5, and the list of practices and examples includes activities that
have previously been addressed by the antitrust laws and the FTC
Act, the suggested disavowal of traditional antitrust standards
(such as a showing of market power and anticompetitive effects)
introduces significant uncertainty about the circumstances where
commonplace business practices would be found in violation of
Section 5 and which, if any, justifications would be
considered.

According to the FTC, Congress intended the courts to provide
deference to the FTC as an independent, expert agency. The FTC has
cited judicial decisions finding that FTC determinations deserve
“great weight,” but it is unclear how the federal
judiciary’s recent efforts to restrain powers of federal
administrative agencies13 will impact the FTC’s
interpretation of Section 5’s broad scope. Additional
litigation and congressional oversight will likely ensue.

The FTC’s guidance may also chill procompetitive conduct, as
businesses become risk averse to avoid Section 5 liability. We
recommend consulting experienced counsel to assess the potential
enforcement risk for conduct under Section 5.

Footnotes

1. Policy Statement Regarding the
Scope of Unfair Methods of Competition Under Section 5 of the
Federal Trade Commission Act
, FEDERAL TRADE COMMISSION, Nov.
10, 2022, https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf
(“Section 5 Statement“).

2. 15 U.S. Code § 45 (2020).

3. Dissenting Statement of
Commissioner Christine S. Wilson, Regarding the “Policy
Statement Regarding the Scope of Unfair Methods of Competition
Under Section 5 of the Federal Trade Commission
Act
, FEDERAL TRADE COMMISSION, Nov. 10, 2022,
at 15, https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf
(“Dissenting Statement“).

4. Statement of Enforcement
Principles Regarding “Unfair Methods of Competition”
Under Section 5 of the FTC Act
, FEDERAL TRADE COMMISSION, Aug.
13, 2015, at 1, https://www.ftc.gov/system/files/documents/public_statements/735201/150813section5enforcement.pdf
(“2015 Statement of Enforcement Principles“).
The Rule of Reason analysis typically requires the plaintiff to
establish (i) the relevant product and geographic market
definition, (ii) market power of the defendant in the relevant
market, and (iii) the existence of anticompetitive effects. The
burden will then shift to the defendant to show an objective
procompetitive justification. If the defendant makes this showing,
then the burden shifts back to the plaintiff to demonstrate that
the procompetitive efficiencies could be reasonably achieved
through less anticompetitive means. The analysis helps distinguish
procompetitive restraints from anticompetitive restraints. See
Ohio
v. Am. Express Co., 138 S. Ct. 2274, 2284
(2018); State Oil v. Kahn, 522 U.S. 3, 10 (1997); Continental
T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).
Under
the consumer welfare standard, an act is anticompetitive “only
when it harms both allocative efficiency and raises the prices of
goods above competitive levels or diminishes their quality.”
Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d
1421, 1433 (9th Cir. 1995).

5. FTC Rescinds 2015 Policy that
Limited Its Enforcement Ability Under the FTC Act
, FEDERAL
TRADE COMMISSION, Jul. 1, 2021, https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-rescinds-2015-policy-limited-its-enforcement-ability-under-ftc-act.

6. According to the FTC, an example of
conduct indirectly implicating competition is misuse of a
regulatory process that creates or exploits impediments to
competition. See Section 5 Statement at 8.

7. Examples of competition on the merits
include “superior products or services, superior business
acumen, truthful marketing and advertising practices, investment in
research and development that leads to innovative outputs, or
attracting employees and workers through the offering of better
employment terms.” See Section 5 Statement at
8-9.

8. Examples include raising prices,
reducing output, limiting choice, lowering quality, reducing
innovation, impairing other market participants, or reducing the
likelihood of potential or nascent competition. See Section 5
Statement
at 10.

9. 2015 Statement of Enforcement
Principles
at 1.

10. Dissenting Statement at
2.

11. Incipient violations include conduct
by businesses that have not gained full-fledged monopoly or market
power, or conduct that has the tendency to ripen into violations of
the antitrust laws. See Section 5 Statement at 12.

12. The FTC explains that this conduct
includes business practices that tend to cause potential harm
similar to an antitrust violation, but that may or may not be
covered by the literal language of the antitrust laws or that may
fall into a “gap” in those laws. As such, the analysis
may depart from prior precedent based on the provisions of the
antitrust laws. See Section 5 Statement at 13.

13. W. Virginia v. Env’t
Prot. Agency
, 142 S. Ct. 2587, 2599 (2022); Sec. &
Exch. Comm’n
v. Cochran, 142 S. Ct. 2707 (2022)
(pending); Axon Enter., Inc. v. Fed. Trade
Comm’n
, 142 S. Ct. 895 (2022) (pending).

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