FAQ About the FTC's Controversial New "Unfair Methods of Competition" Policy
The Federal Trade Commission ("FTC") released a new Policy Statement of its enforcement priorities for Section 5 of the FTC Act, which makes unlawful "unfair methods of competition." Since the passage of the FTC Act in 1914, the FTC has struggled to define with precision what conduct violates § 5 beyond conduct that is unlawful under other antitrust laws. If implemented as drafted, the Policy Statement would mark a significant expansion of antitrust enforcement. However, past FTC efforts at expansive § 5 enforcement have been rejected in the courts.
This Jones Day White Paper summarizes the FTC's Policy Statement, identifies the areas where business risk has changed the most, and provides practical guidance for business about how to react (and not overreact) to this development.
WHAT DID THE FTC ANNOUNCE?
Most private and federal agency antitrust cases involve challenges to conduct that purportedly violates the Sherman Act (conspiracies that harm competition, monopolization, attempted monopolization) or the Clayton Act (certain exclusive contracts, mergers). Section 5 of the FTC Act also makes unlawful "unfair methods of competition." However, it does not define what practices are unfair, and there has been debate since its passage about the extent to which § 5 provides for a wider scope of enforcement than the Sherman or Clayton Acts.
Following a series of losses in court in the early 1980s, the FTC largely has confined § 5 enforcement to cover practices that parallel conduct prohibited under the Sherman or Clayton Acts, for instance, invitations to collude. After withdrawing in July 2021 bipartisan guidance on § 5 that dated back to 2015, the FTC issued a sprawling Policy Statement that, if implemented as drafted, would significantly expand the practices condemned as unlawful.
WHAT DOES THE POLICY STATEMENT SAY?
The Policy Statement introduces "general principles" that indicate—in the FTC's view—whether a practice is an "unfair method of competition" that violates § 5.
- Method of Competition. The FTC defines "methods of competition" to include conduct in the marketplace that directly or indirectly "implicates" competition. The FTC's definition excludes violations of laws such as environmental or tax laws that provide a cost advantage or structural features of a marketplace that are not attributable to a company's conduct such as high concentration or entry barriers.
- Unfair. The Policy Statement then states that conduct is unfair if it "goes beyond competition on the merits." The Policy Statement offers a two-part test to identify such conduct: (i) "conduct may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature"; and (ii) "must tend to negatively affect competitive conditions."
Unlike under the Sherman and Clayton Acts, the Policy Statement claims that the FTC need not prove market definition, market power, or that the conduct harmed or may in the future harm competition. Instead, the FTC says it only has to prove that the conduct "has a tendency to generate negative consequences" for competition, considered in the aggregate with a party's other conduct or the conduct of others in the marketplace. Over the last four decades, the guiding principle in most antitrust cases and agency enforcement (including the FTC's last § 5 policy statement) has been whether a practice harms customers or consumers. The Policy Statement expands that focus to include the effect of any practice on competitors, workers (a novel and progressive concept), or other marketplace participants.
The Policy Statement places the burden on the party to prove any procompetitive justification. And even if there is a legitimate procompetitive benefit, the party must prove that there was no less-restrictive alternative to achieve that objective, and that any benefit outweighs the harm. The Policy Statement expresses skepticism about procompetitive benefits and does not say how the FTC will weigh the effects on different constituencies.
The Policy Statement also includes a list of practices that the FTC or the courts have found to violate § 5 (the first three items below), or that the FTC believes violates the "spirit" of the antitrust laws (the remaining items):
- Invitations to collude;
- Mergers & acquisitions ("M&A"s) or joint ventures ("JV"s) with the tendency to ripen into antitrust violations;
- A series of M&A or joint ventures tending to harm, but individually may not have violated the antitrust laws;
- Loyalty rebates, tying, bundling, and exclusive dealing arrangements tending to ripen into antitrust violations because of industry conditions and the company's position within the industry;
- De facto tying, bundling, exclusive dealing, or loyalty rebates that use market power in one market to harm competition in the same or a related market;
- Practices that facilitate tacit coordination;
- Parallel exclusionary conduct that may cause aggregate harm;
- 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 the Robinson-Patman Act;
- M&A of a potential or nascent competitor that may tend to lessen current or future competition; and
- Cumulative conduct that tends to undermine competitive conditions in the market.
The lone Republican FTC commissioner, in a stinging 20-page dissent, criticized the Policy Statement for: (i) abandoning the consumer-welfare standard1 and the rule of reason (which balances potential harm to competition against procompetitive effects); (ii) lacking guidance about what conduct would violate § 5; and (iii) rejecting the FTC's long-established evidencebased approach in favor of "merely labeling conduct with an appropriate adjective [to] establish liability."
HOW HAS THE FTC ENFORCED § 5 IN RECENT YEARS?
The now-withdrawn 2015 bipartisan policy statement articulated the FTC's view that Congress intended § 5 to cover a broader scope of conduct than the Sherman and Clayton Acts. Less than a page long, it set forth the following § 5 enforcement principles:
- The promotion of consumer welfare is the FTC's guiding principle in § 5 enforcement;
- The FTC uses the rule of reason for § 5 violations to determine the net effect on competition; and
- The FTC is less likely to challenge practices under § 5 on a standalone basis if the conduct could be addressed under the Sherman or Clayton Acts.
The FTC's § 5 cases in recent years have focused on two areas: "incipient" antitrust violation such as invitations to collude and signaling; and misuse of standard-setting processes. Invitations to collude occur when one party invites another to conspire to raise prices, reduce output, or otherwise coordinate competitive behavior without the other party accepting the invitation.2 Signaling involves public statements intended to induce the same outcome. Signaling, invitation to collude, and misuse of standard-setting processes complaints typically involve unilateral conduct. The FTC cannot use Sherman Act § 1 in those cases because an element of a § 1 case—an agreement—is lacking.
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1. The “consumer welfare” standard focuses antitrust analysis on whether there is harm to consumers as distinct from competing producers, other marketplace participants, or other policy considerations. The typical, though not exclusive, focus of the consumer welfare standard is the effect of a business practice or transaction on prices.
2. As detailed in our November 2022 Alert, the Department of Justice Antitrust Division brought its first criminal Sherman Act § 2 case in 50 years involving an invitation to collude. A paving contractor pleaded guilty to attempted monopolization after he allegedly proposed to a competitor for publicly funded highway projects a market-allocation scheme in which the contractor would stop bidding in South Dakota and Nebraska if the competitor stopped bidding in Montana and Wyoming. Instead of agreeing, the competitor reported the contact to the Department of Transportation.
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