United States: The Uncertain Reach Of Section 5 Of The Federal Trade Commission Act

Compliance with US antitrust laws requires firms to consider not only conduct that falls within the scope of the Sherman Act and the Clayton Act, but also conduct that may violate the Federal Trade Commission Act (the "Act"), particularly Section 5. This task is complicated by the fact that the outer scope of Section 5 remains largely undefined, leading to uncertainty as to what conduct is permissible and impermissible. In the absence of further legislative or judicial oversight, it is unclear just how far Section 5 reaches.

Established almost a century ago, the Federal Trade Commission ("FTC") shares enforcement responsibilities for US competition laws with the Antitrust Division of the Department of Justice. The FTC derives its enforcement powers from the Federal Trade Commission Act and the Clayton Act,1 and its enforcement mission is to halt conduct deemed harmful to competition, including practices barred by the Sherman Act, such as price fixing, bid rigging, customer allocation and other per se antitrust violations.2 Although not expressly authorized to enforce the Sherman Act, the FTC reaches such conduct through Section 5, which states that "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."3 But a question going back to when the Act first became law still remains unanswered: beyond conduct that is already prohibited by the Sherman Act and the Clayton Act, precisely what falls within Section 5's prohibition on "unfair methods of competition?"

There are some who have argued that Section 5 is "coterminous" with the Sherman Act and the Clayton Act—a "vehicle by which the [FTC] challenges" traditional antitrust violations.4 Yet it seems clear that Congress intended something else. The legislative history shows that Congress purposefully passed a vague statute to avoid the "endless task" of legislatively drawing the line between fair and unfair practices in all cases and intended that the reach of Section 5 be developed over time.5 As the Supreme Court observed, "[i]t would not have been a difficult feat of draftsmanship to have restricted the operation of [Section 5] to those methods of competition in interstate commerce which are forbidden at common law or which are likely to grow into violations of the Sherman Act, if that had been the purpose of the legislation."6

The more widely accepted argument is that Section 5 "was intended from its inception to reach conduct that violates not only the antitrust laws, but also the policies that those laws were intended to promote"7 and that Congress "adopted a phrase which ... does not admit of precise definition, [because] the meaning and application [would] be arrived at by ... the gradual process of judicial inclusion and exclusion."8 However, while the Sherman Act's equally vague ban on any "contract, combination ... or conspiracy, in restraint of trade" now incorporates a vast body of case law interpreting its meaning, Section 5 jurisprudence did not develop the same way.

Sperry & Hutchinson was the Supreme Court's last comprehensive analysis of the FTC's Section 5 powers. That opinion, however, is 40 years old and has been described as controversial.9 In Sperry, the FTC entered a cease-and-desist order against Sperry & Hutchinson Co. (S&H) for attempting to "suppress the operation of trading stamp exchanges and other 'free and open' redemption of stamps."10 The Fifth Circuit vacated the order, finding that S&H's conduct had not "violated either the letter or the spirit of the antitrust laws," and thus the order exceeded the scope of Section 5.11 Without reaching the question of whether S&H's conduct did, in fact, violate the letter or spirit of existing antitrust laws, the Supreme Court found that Section 5 empowers the FTC to define and proscribe unfair competitive practices, even if not an infringement of other antitrust laws.12 The Supreme Court concluded that the FTC "does not arrogate excessive power to itself if, in measuring a practice against the elusive, but congressionally mandated standard of fairness, it, like a court of equity, considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws."13

Analogizing the FTC's powers to those of a court of equity signals the Supreme Court's view, at the time, that Section 5 powers were quite broad, perhaps not even constrained by precedent. But circuit courts later found that Section 5 has its limits. For example, in E.I. du Pont de Nemours & Co. v. F.T.C.,14 although conceding that a definition of "unfair" methods of competition is "elusive," the court vacated the FTC's finding that competing firms in an oligopoly violated Section 5 by unilaterally and non-collusively adopting practices that included: (1) the sale of a product by all four firms at a delivered price, which included transportation costs; (2) providing "extra" advance notice of price increases; and (3) the use of "most favored nation" clauses in contracts with customers. The court explained its view on the outer reach of Section 5, holding that, when a practice is not "collusive, coercive, predatory or exclusionary in character, the standards for determining whether it is 'unfair' ... must be formulated to discriminate between normally acceptable business behavior and conduct that is unreasonable or unacceptable."15 Otherwise the "door would be open to arbitrary or capricious administration" of Section 5, because "the FTC could, whenever it believed that an industry was not achieving its maximum competitive potential, ban certain practices in the hope that its action would increase competition."16

The last time a circuit court evaluated a pure Section 5 claim was 1992, and the standards for determining what is "unfair" continue to remain obscure.17 Recognizing this obscurity, Commissioner Joshua Wright recently advocated that the FTC should focus its Section 5 efforts on "plainly anticompetitive conduct"—meaning a practice that "(1) harms or is likely to harm competition significantly and that (2) lacks cognizable efficiencies."18 Making clear that his position is a starting point for further dialogue, the Commissioner explained this definition would permit the FTC to prosecute conduct that, while falling outside the Sherman or Clayton Act, would not be

controversial, because it is already deemed anticompetitive. Citing modern concepts of antitrust harm, Section 5 would, for example, reach "invitation[s] to collude" or the acquisition of too much market power, falling short of a monopoly.19 It remains to be seen whether this approach, or one like it, will be formally adopted or pursued. Still, such a definition might sweep within its scope conduct that, in and of itself, does not violate other antitrust laws and lead to potential penalties for legitimate, non-collusive conduct. For example, one might argue that, under such a definition, an oligopoly like the one at issue in du Pont could be deemed a violation of Section 5.

Proponents of expansive Section 5 powers note that the FTC is an expert agency that Congress intended to have a central role in policing business conduct. They further note that, unlike the Sherman Act, there is no private right of action under Section 5—which, in theory, limits exposure to damages for conduct that does not, standing alone, violate other antitrust laws. However, while there may be no express private right of action at the federal level, numerous states have enacted their own versions of Section 5 that permit private actions and, in some cases, trebled or punitive damages.20

In addition, the FTC has previously sought and obtained significant monetary penalties in the form of disgorgement and restitution. For example, in FTC v. Mylan Laboratories, Inc.,21 the court accepted the FTC's argument that it could seek monetary relief for violations of Section 5, because doing so is a "natural extension of the remedial powers authorized under § 13(b)."22 The case was later resolved when the defendants agreed to pay $100 million into a fund, that included compensation for indirect purchasers who allegedly were injured.23 At the time, certain Commissioners recognized the significant federal antitrust policy implications of the settlement, in light of the decisions in Hanover Shoe, Inc. v. United Shoe Machinery Corp. and Illinois Brick Co. v. Illinois.24

More recently, in July 2012, the FTC withdrew its existing Policy Statement on Monetary Remedies in Competition Cases that had been in place since 2003. The Statement outlined those circumstances where the FTC would seek monetary penalties. In withdrawing it, the FTC explained that "the practical effect of the Policy Statement was to create an overly restrictive view of the Commission's options for equitable remedies."25 This may signal the likelihood that US businesses will see more FTC attempts to impose monetary penalties in future competition cases.

Further, private plaintiffs regularly cite enforcement proceedings to demonstrate the plausibility of their claims and evade dismissal motions. An expert agency's determination that certain conduct constitutes an "unfair method of competition," even if not falling within the strict contours of a traditional Sherman Act claim, could be an element relied upon by private plaintiffs to successfully plead a Sherman Act claim, opening the door to the expense of antitrust discovery and the potential for trebled damages. For example, a private plaintiff might rely upon Section 5 proceedings based on so-called "invitations to collude," or the exchange of commercially sensitive information, to demonstrate a plausible Sherman Act Section 1 claim.26 Indeed, a jury might be permitted to infer the existence of a tacit agreement based on this type of conduct.27

Consider a case like In re Bosley,28 where the FTC found that an exchange of competitively sensitive information could "mutate into a conspiracy" and "[c]ompetition may be unreasonably restrained whenever a competitor directly communicates, solicits, or facilitates exchange of competitively sensitive information with its rivals." Such proscriptions conceivably sweep in a wide variety of completely legitimate conduct. And, although it is clear that such conduct, standing alone, is not enough to plead a traditional antitrust violation—since plaintiffs must

allege more than just an "opportunity" to collude29—the existence of FTC proceedings and/or an adverse FTC finding may nonetheless help plaintiffs get beyond the pleading stage of a Sherman Act claim.30 What is more, the modern enforcement environment makes it unlikely that firms will elect to litigate a Section 5 claim—all but foreclosing the possibility that a robust body of case law may someday develop. As in all types of adversarial proceedings, firms elect to settle Section 5 claims for a variety of reasons, including a desire to avoid protracted costs, inherent uncertainty, bad publicity and potential sanctions that can come from choosing to litigate with the government.

So, what can firms do to avoid running afoul of Section 5? Because the FTC has yet to adopt any specific parameters that define the boundaries of Section 5 power, companies continue to be left in the dark as to precisely what type of conduct amounts to a violation. This uncertainty makes it more important than ever to provide employees with careful guidance on how to limit exposure and avoid sliding into "gray" areas. Also, further guidance from the FTC could be coming soon.

After decades of relative silence on the issue, this past year saw a growing coalition of support for establishing Section 5 guidelines. For instance, in addition to the (albeit vague) limiting principles proposed by Commissioner Wright, several members of Congress also recently encouraged the FTC to specify the scope of its Section 5 authority. Corporate counsel should keep abreast of these developments, because, until the FTC formally clarifies its position on the reach of Section 5, US businesses will be forced to wrestle with how to ensure compliance with an ambiguous law. u


1 See Federal Trade Commission, About the Bureau of Competition, available at http://www.ftc.gov/bc/about.shtm .

2 See id. at http://www.ftc.gov/bc/non-merger.shtm .

3 15 U.S.C. § 45(a)(6).

4 See Section 5 Recast: Defining the FTC's Unfair Methods of Competition Authority, Remarks of Joshua D. Wright, FTC Commissioner, available at http://www.ftc.gov/speeches/wright/130619section5recast.pdf ; Concurring Opinion of Commissioner Jon Liebowitz at 3, In re Rambus, Inc., FTC Docket No. 9302 (Aug. 2, 2006), available at http://www.ftc.gov/os/adjpro/d9302/060802rambusconcurringopinionofcommissionerleibowitz.pdf .

5 See H.R. Rep. No. 63-1142, at 19 (1914).

6 Federal Trade Commission v. R.F. Keppel & Bro., 291 U.S. 304, 310 (1934).

7 See Concurring Opinion of Commissioner Jon Liebowitz at 1-2, In re Rambus, Inc., FTC Docket No. 9302 (Aug. 2, 2006), available at http://www.ftc.gov/os/adjpro/d9302/060802rambusconcurringopinionofcommissionerleibowitz.pdf .

8 See Federal Trade Commission v. R.F. Keppel & Bro., 291 U.S. 304, 311-12 (1934)

9 Although the Supreme Court has not recently revisited this issue, in F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447, 454-55 (1986), the Court signaled its continued adherence to Sperry. In that case, which is now also more than 25 years old, the Court explained: "[t]he standard of 'unfairness' under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons."

10 FTC v. Sperry Hutchinson Co., 405 U.S. 233, 234 (1972). Trading stamps are similar to postage stamps.

11 Id. at 235.

12 Id. at 239.

13 Id. at 244.

14 729 F.2d 128, 130, 137 (2d Cir. 1984).

15 Id. at 138-39

16 Id. at 138-39.

17 See James Campbell Cooper, Working Paper No. 13-20, The Perils of Excessive Discretion, The Elusive Meaning of Unfairness in Section 5 of the FTC Act (November 2013), available at http://mercatus.org/publication/perils-excessive-discretion-elusive-meaning-unfairness-section-5-ftc-act.

18 Section 5 Recast at 15.

19 Section 5 Recast at 19-20.

20 Hakala, Justin J., Follow-On State Actions Based on the FTC's Enforcement of Section 5, 7-9 (Wayne State Univ. Law Sch., Working Paper Grp., Oct. 9, 2008), available at http://www.ftc.gov/os/comments/section5workshop/537633-00002.pdf .

21 62 F.Supp.2d 25, 37 (D.D.C. 1999).

22 15 U.S.C. § 53(b).

23 See FTC Press Release, available at http://www.ftc.gov/es/node/64092.

24 See id. ("[a] particularly serious spillover effect of the federal court decisions in this case is the potential conflict with federal policy established by the decisions in Hanover Shoe, Inc. v. United Shoe Machinery Corp. and Illinois Brick Co. v. Illinois, and consistently maintained since that time.")

25 See FTC Press Release, available at http://www.ftc.gov/news-events/press-releases/2012/07/ftc-withdraws-agencys-policy-statement-monetary-remedies .

26 See, e.g., Thomas Dahdouh, Section 5, The FTC and Its Critics: Just Who Are the Radicals Here?, 20 No. 2, J. Antitrust & Unfair Comp. Law of Cal. 1, 20-21 (Fall 2011).

27 Monsanto Co. v. Spray–Rite Service Corp., 465 U.S. 752, 764 n. 12 (1984)

28 See ANALYSIS OF AGREEMENT CONTAINING CONSENT ORDER TO AID PUBLIC COMMENT, In re Bosley, Inc., File No. 121-0184 at 2 (2013) available at http://www.ftc.gov/sites/default/files/documents/cases/2013/04/130408bosleyanal.pdf .

29 See, e.g., Bell Atlantic Corp. v. Twombly, 550 U.S.544, 567 (2007); In re Citric Acid Litig., 191 F.3d 1090, 1098 (9th Cir. 1999); Cosmetic Gallery, Inc. v. Schoeneman Corp., 495 F.3d 46, 53 (3d Cir. 2007); Williamson Oil Co. v. Philip Morris USA, 346 F.3d 1287, 1319 (11th Cir. 2003).

30 Indeed, some courts have allowed Sherman Act claims to proceed past the pleading stage even though the alleged practice was "not illegal in itself," because the conduct purportedly "facilitate[d] price fixing." In re Text Messaging Antitrust Litigation, 630 F.3d 622, 627–29 (7th Cir. 2010).

Originally published Spring 2014

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