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November 17, 2022

FTC Announces New Guidelines for its Section 5 Enforcement Efforts

Advisory

On November 10, 2022, the Federal Trade Commission (FTC or Commission) issued a policy statement outlining the Commission’s expanded approach to enforcement of Section 5 of the FTC Act, which prohibits “unfair methods of competition.” The FTC’s “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act”1 (2022 Statement) comes sixteen months after the Commission withdrew a bipartisan 2015 statement addressing the same topic.2 Unlike the 2015 statement, however, the Commission vote here was split along party lines, with three Democratic Commissioners voting to approve the 2022 Statement and the one Republican Commissioner voting no. The 2022 Statement is just the latest action by current antitrust agency leadership to expand the scope of their enforcement powers and indicates that the FTC, in particular, will scrutinize a wide range of conduct not thought previously to violate the antitrust laws.

History of FTC’s Section 5 Enforcement Policy

Section 5 of the FTC Act prohibits “[u]nfair methods of competition in or affecting commerce[.]”3 Although the Commission brings its non-merger actions under Section 5 rather than the Sherman Act, there has been disagreement about the breadth of Section 5 and what type of conduct it should reach, beyond what the Sherman and Clayton Acts may prohibit.4 Conduct pursued under Section 5 that does not otherwise violate the other antitrust laws is sometimes referred to as a “standalone” Section 5 violation. One generally accepted “standalone” Section 5 theory of harm is an invitation to collude where no agreement has been reached.5 There is otherwise much debate about what other conduct might constitute a standalone Section 5 violation.6 Indeed, one court commented that “[t]he term ‘unfair’ is an elusive concept, often dependent upon the eye of the beholder.”7

In 2015, a bipartisan majority of the FTC issued a “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act”8 (2015 Statement) in an effort to provide guidance to the public as to the scope of standalone Section 5 enforcement. In the 2015 Statement, the Commission set out three “principles” by which it would decide whether to challenge an act or practice as an unfair method of competition. First, the Commission announced it intended to be guided by the traditional public policy underlying the antitrust laws: “the promotion of consumer welfare” (typically thought of as lower prices, higher quality products, and higher output). Second, the Commission anticipated evaluating challenged conduct under a framework similar to the rule of reason, which would assess harm to competition and take into account “cognizable efficiencies and business justifications.” Finally, the Commission noted that it would be less likely to challenge a particular action under standalone Section 5 if the Sherman Act or Clayton Act were sufficient to address the conduct’s competitive harm. As then-Chair Edith Ramirez noted, even though the 2015 Statement did not provide a “detailed code of regulations,” it did include concepts “widely used” in antitrust law.9

In July 2021, the Commission rescinded the 2015 Statement. Current FTC Chair Lina Khan expressed concern that the 2015 Statement limited the FTC’s enforcement ability. She argued that to the extent that Section 5 enforcement was largely conterminous with the Sherman Act, this would “turn[] standalone Section 5 into a dead letter.” 10 Instead, Chair Khan indicated that the FTC would approach Section 5 enforcement more broadly.

The 2022 Statement

The Commission’s 2022 Statement presents a much broader interpretation of standalone Section 5 authority. The 2022 Statement purports to rely on the “text, structure, and history of Section 5” to distinguish the FTC’s authority in this space as beyond the accepted parameters of the Sherman and Clayton Acts.11 In particular, the Commission signaled its intention to challenge conduct that “goes beyond competition on the merits” as well as conduct “that constitutes an incipient violation of the antitrust laws or that violates the spirit of the antitrust laws.”12

The FTC’s new framework to identify unfair methods of competition contains two conditions: (1) the challenged conduct must be “[a] method of competition,” which “is conduct undertaken by an actor in the marketplace—as opposed to merely a condition of the marketplace, not of the respondent’s making” and (2) “[t]he method of competition must be unfair, meaning that the conduct goes beyond competition on the merits.”13

To determine whether conduct goes beyond competition on the merits, the FTC stated that it intends to consider two principles: (1) whether challenged conduct is “facially unfair” (which the FTC appears to define as conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, [] involve[s] the use of economic power of a similar nature. . . . [or] otherwise restrictive or exclusionary”) and (2) whether the challenged conduct “tend[s] to negatively affect competitive conditions—whether by affecting consumers, workers or other market participants.”14

The FTC stated that it would weigh these factors on a “sliding scale” approach. Most notably, the FTC suggested that if it determines the conduct is “facially unfair,” “less may be necessary” to show that the conduct negatively affects competitive conditions. If conduct is not facially unfair, the FTC will consider whether the conduct tends to negatively affect competitive conditions. Here, as part of its analysis, the FTC will take into account the conduct’s “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.”15 However, the FTC will not require a “separate showing of market power or market definition” or “actual harm,” but would consider more broadly the consequences of the challenged action occurring in the aggregate with other actors engaging in similar behavior.16 The 2022 Statement also sets forth that the burden would be on the respondent to show that any asserted benefits outweigh identified harms—and that any such benefits were not “outside the market where the harm occurs.” 17 Further, the FTC indicated that it would not assess these factors under any sort of “net efficiencies test or a numerical cost-benefit analysis,” but would instead take a broader view which might also include “non-quantifiable harms.”18

Commissioner Wilson’s Dissent

Dissenting Commissioner Christine Wilson sharply criticized the majority for adopting an “‘I know it when I see it’ approach” and abandoning “bedrock principles of antitrust that long have been accepted by the Commission, the courts, the business community, and enforcers across the globe.”19 The dissent takes issue with the majority’s decision to (1) abandon the rule of reason framework; (2) replace the consumer welfare standard, potentially protecting workers and less-efficient competitors at the expense of consumers; and (3) broadly condemn otherwise lawful conduct supported by precedent.20

According to Commissioner Wilson, the majority puts forth “a quick look analysis that approximates per se condemnation,” in lieu of the rule of reason.21 In her view, abandoning the consumer welfare standard removes a clear goal around which businesses could structure their behavior. 22 Finally, the dissent also criticizes the majority for placing too much reliance on its own assessment of what is unlawful while taking away meaningful protections for businesses that show “efficiencies and other benefits or justifications.”23 She expresses concern that the Commission’s new “open-ended approach” would condemn the very conduct that courts have previously refused to condemn under the antitrust laws. For instance, “[n]ewly condemned conduct may include tacit coordination; parallel conduct; price discrimination not covered by the Robinson-Patman Act; de facto tying, bundling, exclusive dealing, and loyalty rebates; mergers that do not violate the Clayton Act; and interlocking directorates not covered by the Clayton Act.”24

Furthermore, the dissent states that the 2022 Statement fails to “provide clear guidance to businesses seeking to comply with the law,” establish a consistent approach for the term “unfair,” “provide a framework that will result in credible enforcement,” or fully account for the legislative history that “demands economic content for the term ‘unfair’ and cautions against an expansive approach to enforcing Section 5.”25 Indeed, she asserts that, in some instances, the 2022 Statement’s “lack of identified priorities and rules for balancing interests means that enforcement will be subject to the whims and political agendas of sitting Commissioners.”26 Thus, it will be difficult for businesses to “structure their conduct to avoid possible liability.”27

In sum, Commissioner Wilson pushes back on the majority for replacing previous guidelines, which found support in economic analysis and legal precedent, with a statement that “resembles the work of an academic or a think tank fellow who dreams of banning unpopular conduct and remaking the economy.”28

Looking Ahead

The 2022 Statement is not binding on courts and does not change the law, but it marks the latest attempt by FTC leadership to expand the scope of its enforcement power and to disregard the consumer welfare standard. It may be the case that the FTC plans to use Section 5 to overcome impediments to challenges presented by existing precedent under the other antitrust laws (e.g., Section 2 of the Sherman Act). It remains to be seen whether federal courts hearing Section 5 challenges (including courts of appeal hearing appeals from Commission decisions after trial before an administrative law judge) will accept the new approach contained in the 2022 Statement—especially because the “Policy Statement expressly states that it is willing to disregard judicial experience.”29 And, as Commissioner Wilson noted, “[c]ourts have been unwilling to find violations of Section 5 beyond the limits of the Sherman, Clayton, and Robinson-Patman Acts when the Commission’s theory of liability cannot be turned into workable rules or standards that can guide the conduct of businesses.”30

Nonetheless, the FTC has staked out its position for future investigations and enforcement actions. Even if a federal court ultimately finds that a business’s conduct is lawful, antitrust investigations and litigation can still be costly and distracting for a business. Moreover, a wide range of conduct, previously considered lawful, may now be subject to investigation and legal challenges. This seems particularly true of conduct, including mergers and acquisitions, that the FTC believes merely could lead to conduct that harms the competitive process. Because federal courts of appeal must defer to the Commission’s findings of fact in the appeal of a Commission decision following an administrative trial, the key question will be whether the Commission’s conclusion that anticompetitive effects are possible is enough as a matter of law to violate Section 5.

Firms with high shares and firms that engage in conduct that disadvantages competitors will need to consider their tolerance for risk given the uncertainty and the costs of defending an FTC investigation and enforcement proceeding, at least until the courts have a chance to weigh in on the FTC’s new approach. While this is especially true for businesses operating in industries where the FTC has recently focused its enforcement efforts (e.g., digital markets and the pharmaceuticals), all companies should ensure that compliance programs are up to date, employees are mindful of antitrust issues and antitrust counsel has the opportunity to weigh in on conduct that could pose risks under the FTC’s new approach to Section 5.

* Jennifer Chang contributed to this Advisory. Ms. Chang is a graduate of the University of Chicago Law School and is admitted to the Illinois Bar. She is employed at Arnold & Porter’s Washington, DC Office as an Associate.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. FTC Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act (Nov. 10, 2022), available here.

  2. See Arnold & Porter Advisory, FTC Open Meeting Announces Expansion of FTC’s Antitrust Enforcement Focus (July 8, 2021), available here.

  3. 15 USC § 45(a)(1).

  4. Arnold & Porter Advisory, FTC Open Meeting Announces Expansion of FTC’s Antitrust Enforcement Focus (July 8, 2021), available here.

  5. Id.

  6. Id.

  7. E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 137 (2d Cir. 1984).

  8. FTC Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (Aug. 13, 2015), available here.

  9. Address by FTC Chairwoman Edith Ramirez to the Competition Law Center at George Washington University Law School at 9 (Aug. 13, 2015), available here.

  10. Statement of Chair Lina M. Khan Joined by Commissioner Rohit Chopra and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act at 1, 7 (July 1, 2021), available here.

  11. FTC Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act at 2 (Nov. 10, 2022), available here.

  12. Id. at 8, 12.

  13. Id. at 8–9 (“Competition on the merits may include, for example, 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.” (citations omitted)).

  14. Id. at 9.

  15. Id. at 10.

  16. Id.

  17. Id. at 12.

  18. Id. at 11.

  19. 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” at 2–3 (Nov. 10, 2022), available here.

  20. See id. at 8.

  21. Id. at 6.

  22. See id. at 8 (“The consumer welfare standard protects consumers, resulting in lower prices, higher quality, and more innovation.”).

  23. Id. at 6.

  24. Id. at 13.

  25. Id. at 3.

  26. Id. at 8.

  27. Id. at 13.

  28. Id. at 2.

  29. 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” at 7 (Nov. 10, 2022), available here (citing FTC Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act at 13–14 (Nov. 10, 2022), available here).

  30. Id. at 14 (citation omitted).

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