United States: FTC Puts "Standalone" Section 5 Enforcement Approach On The Record

Last Updated: August 19 2015
Article by Alex Okuliar and Antony P. Kim

For the first time in its 101-year history, the Federal Trade Commission yesterday issued a policy statement outlining the extent of its authority to police "unfair methods of competition" on a "standalone" basis under Section 5 of the Federal Trade Commission Act.1  In a terse Statement of Enforcement Principles, the Commission laid out a framework for its Section 5 jurisprudence that was predictably tethered to the familiar antitrust "rule of reason" analysis but also sets forth a potentially expansive approach to enforcement.2  Indeed, the Commission's approach could encompass novel enforcement theories premised on acts or practices that "contravene the spirit of the antitrust laws" as well as those incipient acts that, if allowed to mature or complete, "could violate the Sherman or Clayton Act."3  Commissioner Ohlhausen's lone dissent recognizes these potentially disconcerting developments for private industry.4

Summary of Statement and Dissent

The Commission identified three core principles that will frame its decisions to challenge an act or practice as an unfair method of competition on a standalone Section 5 basis:

  • First, the Commission will consider the public policy underlying the antitrust laws for guidance, "namely, the promotion of consumer welfare;"5
  • Second, the Commission will apply "a framework similar to the rule of reason," meaning the "act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process," taking into account "cognizable efficiencies and business justifications;"6 and,
  • Third, the Commission is less likely to pursue a standalone Section 5 claim if enforcement under the "Sherman or Clayton Act is sufficient" to address the competitive harm.7

Interestingly, the Commission represents that it will apply something "similar" to a rule of reason analysis, but not necessarily the rule of reason itself. This potentially expansive approach is made clear in a second Statement by the Commission where it offers only that decisions will be "informed by economic analysis"8 and leverage "accumulated knowledge and experience." 9

In her dissent, Commissioner Ohlhausen took issue with "such an unbounded interpretation" of the law as it "is almost certain to encourage more frequent exploration of this authority in conduct and merger investigations and standalone Section 5 enforcement by the Commission."10 She offered pointed criticisms of the Commission Statement, including that it contains little practical guidance for how the Commission will apply its policy.11 She also notes that it is written so broadly as to potentially encompass a wide range of acts or practices that fall short of Sherman or Clayton violations, including "breach of standard-setting commitments, loyalty discounts, facilitating practices, conscious parallelism, business torts, incipient violations of the antitrust laws, and unfair competition through violation of various laws outside the antitrust context."12 The Commissioner pointed out that the Commission Statement does not reflect a change from the agency's current case-by-case approach and could lead to a divergence in enforcement when compared to the Antitrust Division of the U.S. Department of Justice, which does not have similar statutory authority.13 She also criticized the Commission for not seeking public comment before issuing the Statement.14

Key Takeaways

Despite its brevity, the Commission Statement could have several important implications for federal and state antitrust enforcement.

  • The Commission has chosen "flexibility" over stakeholder "certainty."

The Statement largely endorses the Commission's traditional case-by-case approach, which was preferred in particular by Chairwoman Ramirez and Commissioner Brill. As the Chairwoman has said before, "I favor the common law approach, which has been a mainstay of American antitrust policy since the turn of the twentieth century."15 At the time, she also observed that "there is some tension between flexibility and certainty" and "if we think a little more deeply, we see that erring on the side of rigidity produces certainty only for some commercial actors, not necessarily for the marketplace as a whole."16 The Chairwoman reiterated this point yesterday in her remarks announcing the statement when she said, "As Congress understood when it gave the Commission the authority to apply this broadly worded phrase, the Commission would need to apply this provision flexibly, and on a case-by-case basis, to deal with constant flux in the American economy."17

The approach in the Commission Statement differs sharply from those of Commissioners Ohlhausen and Wright, who are both advocates of greater formality and certainty in the agency's analysis. Commissioner Wright, despite voting in favor of the Statement, has expressed that his "preferred approach" is to use standalone Section 5 authority "only ... where there are no cognizable efficiencies present."18 This would represent a very stringent test that would have been deferential to legitimate business justifications.  He also observed in a co-authored article last year that a case-by-case analysis could not offer meaningful guidance.  He wrote, "Although the desire to strike the correct balance between flexibility and certainty is well intended, relying upon the common law approach to define the scope of Section 5 ultimately offers no certainty and results in a boundless standard under which the Commission may prosecute any conduct as an unfair method of competition."19

Commissioner Ohlhausen has proposed in the past a multi-step analysis for Section 5 cases that would require a "substantial" harm to competition and a "disproportionate" harm to consumers.20  Her test falls between the Commission Statement and Commissioner Wright's preferred approach, placing a greater burden on the FTC to make its case while also providing specific guidance to industry on how to avoid potential liability. The Commission did not pursue or propose any of these more precise formulations of Section 5 authority, opting instead for flexibility that offers little guidance to industry, consumers and other stakeholders.

  • The Commission may consider challenging more matters administratively.

The Commission's decision to retain enforcement flexibility makes the Commission Statement susceptible to the same criticism that initially animated many stakeholders' concerns about a case-by-case approach. That is, unlike the common law for traditional antitrust matters like those brought in federal court by the Department of Justice, standalone Section 5 authority in the past has not been used frequently enough for any meaningful common law to develop.21 Indeed, critics have pointed out the relative paucity of such cases and the poor success rate of standalone Section 5 cases when appealed to federal court.22 Given the Commission's formal commitment to developing its standalone Section 5 authority using a case-by-case approach, the agency may consider turning more frequently to administrative challenges to address standalone Section 5 cases, allowing the agency to build a body of relevant law internally.

  • The Commission views its mission broadly and may pursue novel theories, especially in areas of policy tension or in emerging industries.

The Commission now has formally endorsed a policy that its competition enforcement authority extends beyond that of the DOJ to include acts or practices that "contravene the spirit of the antitrust laws." As broad as this language is, Chairwoman Ramirez in her speech yesterday indicated a potentially even more expansive understanding of the agency's enforcement role. In announcing the new Statement, she pointed out that "Congress wrote the prohibition against unfair methods of competition . . . and it purposefully chose open-ended language to accommodate the new agency's broad institutional mission."23 She then went on to note that Congress assigned the Commission an "open-ended mandate" to identify and remedy new forms of potentially anticompetitive conduct because "markets, commercial practices, and economic analysis are all in a state of flux."24

This language could suggest a more ambitious interpretation of the agency's mission.25 Such a view of the agency's role could be most keenly felt in industries that exhibit less well-understood competitive dynamics or in cases that present nuanced questions involving tensions between antitrust principles and the principles animating other areas of law – including, for example, the intellectual property laws, the Hatch-Waxman Act or the interplay between competition and data privacy and security. Agency Staff may feel more comfortable approaching difficult cases without the need to develop theories of liability tied directly to established antitrust doctrine.26 In fact, some of the most aggressive modern cases that the agency lost in the early 1980s, such as challenges involving simple oligopolistic conduct, may well fit within the new rubric set out in the Commission Statement.27

  • The Commission and DOJ may diverge in their approaches to certain conduct.

The Commission Statement could also lead to a greater divergence in enforcement priorities and analyses between the FTC and DOJ. The two enforcement agencies have overlapping jurisdiction for many industries, but also possess sole or primary oversight for others (e.g., pharmaceutical products, oil and gas, telecommunications). The Commission's new approach risks creating meaningful differences between how each agency approaches conduct in its area of industry coverage and, effectively, different rules for different industries. Perhaps even more difficult for industry stakeholders is that the FTC may advocate for a broader role in prosecuting conduct in industries that both agencies cover today. This could include certain technology businesses where the Commission could seek to apply its "flexible" Section 5 authority to complex, multi-faceted ecosystems that do not fit neatly into traditional antitrust analyses.

The Commission Statement might prompt Congress to step in and resolve the possibility of asymmetrical enforcement. Congress is already sensitive to the issue of bifurcated competition enforcement with respect to mergers. It has held hearings and is currently examining concerns over a perceived difference between the standards applied to the agencies by federal courts for preliminary injunctions to block proposed deals.28 Many argue that the FTC benefits from a more relaxed "serious questions" standard, resulting in increased leverage for the agency and an arbitrary bias against deals in industries and between companies that happen to be reviewed by the FTC rather than the DOJ.29

  • The Statement may have implications for interpreting state unfair competition laws.

Finally, looking beyond the enforcement priorities and bandwidth of the Commission, many states have laws modeled on the FTC Act that provide private parties, including the class action plaintiffs' bar, to bring unfair competition or unfair business practices claims. As a result, courts often interpret these state statutes, often referred to as "Little FTC Acts," by relying on cases and enforcement policies applying or interpreting the FTC Act. The Commission's embrace of an undefined analytical framework "similar to a rule of reason analysis," and its amorphous standard of acts or practices that "contravene the spirit" (but not necessarily the substance) of the antitrust laws, may engender more private party and class action litigation, and also may influence how courts interpret and apply state unfair competition laws.

Conclusion

Companies are well advised to keep an eye on what may be a growing "delta" between core Sherman or Clayton Act violations and allegations of "unfair methods of competition" that will invite a Section 5 investigation by the Federal Trade Commission or trigger litigation under state unfair competition laws. Despite the Commission's efforts to include a "business as usual" message in the Statement, the announcement also suggests a broader vision for the use of this unique standalone authority to identify and police novel conduct that otherwise would not violate the antitrust laws. Companies should take this opportunity to review and update their antitrust compliance policies and practices.

Footnotes

1 15 U.S.C. § 45(a)(1).

2 Fed. Trade Comm'n, Statement of Enforcement Principles Regarding "Unfair Methods of Competition" Under Section 5 of the FTC Act (August 13, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/735201/150813section5enforcement.pdf

3 Id.

4 Maureen Ohlhausen, Commissioner, FTC, Dissenting Statement (August 13, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/735371/150813ohlhausendissentfinal.pdf

5 Commission Statement of Principles, at 1.

6 Id.

7 Id.

8 Fed. Trade Comm'n, Statement on the Issuance of Enforcement Principles Regarding 'Unfair Methods of Competition' Under Section 5 of the FTC Act, at 1 (Aug. 13, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/735381/150813commissionstatementsection5.pdf

9 Id.

10 Ohlhausen Dissent, at 1.

11 Id. at 1.

12 Id. at 3-4 (internal citations omitted).

13 Id. at 4.

14 Id. at 5.

15 Edith Ramirez, Chairwoman, FTC, Keynote Address: Unfair Methods and the Competitive Process: Enforcement Principles for the FTC's Next Century, George Mason Univ. Symposium, at 6 (Feb. 13, 2014),available at https://www.ftc.gov/system/files/documents/public_statements/314631/140213section5.pdf; see also Interview with Julie Brill, Antitrust Source, at 6 (Feb. 2012), available at https://www.ftc.gov/sites/default/files/documents/public_statements/interview-ftc-commissioner-julie-brill/120229antitrustsource.pdf.

16 Id.

17 Edith Ramirez, Chairwoman, FTC, Address to Competition Law Center, George Washington University Law School, at 1 (Aug. 13, 2015), available at https://www.ftc.gov/system/files/documents/public_statements/735411/150813section5speech.pdf.

18 Joshua Wright, Commissioner, Section 5 Revisited: Time for the FTC to Define the Scope of its Unfair Methods of Competition Authority, at 16 (Feb. 26, 2015), available at https://www.ftc.gov/public-statements/2015/02/section-5-revisited-time-ftc-define-scope-its-unfair-methods-competition.

19 Jan Rybnicek & Joshua Wright, Defining Section 5 of the FTC Act: The Failure of the Common Law Method and the Case for Formal Agency Guidelines, 21 Geo. Mason L. Rev. 1287, 1304 (2014).

20 See, e.g., Maureen Ohlhausen, Section 5 of the FTC Act: Principles of Navigation, 2 J. Antitrust Enforcement 1 (2014).

21 See, e.g., Rybnicek & Wright, Defining Section 5, at 1304-05.

22 See id. at 1287-88.

23 Ramirez Remarks, at 3.

24 Id. at 6.

25 This is an issue that Commissioner Ohlhausen notes in her dissent. Ohlhausen Dissent, at 4.

26 While it most certainly cannot be ascribed to current agency Staff, the FTC has in the distant past made assertive use of its unfair methods of competition authority. For instance, before passage of the Wheeler-Lea Act in 1938 – which gave agency its consumer protection authority – the FTC regularly pursued consumer protection claims like deceptive advertising as unfair methods of competition. See Maureen Ohlhausen & Alexander Okuliar, Competition, Consumer Protection, and the Right [Approach] to Privacy, 80 Antitrust L. J. 121, 138-140 (Spring 2015).

27 Ohlhausen Dissent, at 2.

28 Ohlhausen Dissent, at 5 n. 16.

29 See H.R. 5402, 113th Cong. (2014); Hearting on the "Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act of 2014, Before the Subcomm. on Regulatory Reform, Commercial and Antitrust Law of the H. Comm. on the Judiciary, 113 Cong. 2 (2014) (statement of Deborah Garza discussing concerns about the FTC).

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