Legal Alert

FTC’s New Section 5 Policy Statement Signals Significant Expansion of the Agency’s Enforcement Authority

by Leslie E. John and Kayla Martin
November 15, 2022

Summary

The FTC last week signaled an expansion of its enforcement ability under Section 5 of the FTC Act. Section 5 prohibits “unfair methods of competition in or affecting commerce.” On November 10, 2022, the FTC issued a new policy statement that broadly construes “unfair methods of competition” and announces the agency’s intention to use Section 5 to aggressively police conduct it deems unfair, regardless of whether the conduct violates the Sherman or Clayton Acts.

The Upshot

  • The FTC, following a 3-1 vote, issued a new policy statement that expands the reach of Section 5 of the FTC Act prohibiting “unfair methods of competition.”
  • The policy statement sets forth broad principles that the FTC will assess when determining whether conduct constitutes an unfair method of competition.
  • The policy statement has been met with sharp criticism, but businesses should expect the FTC to engage in increased antitrust scrutiny.

The Bottom Line

The FTC’s new guidance expands the agency’s power and potentially allows the FTC to challenge business practices it previously has not targeted. Although the scope of the FTC’s authority likely will be challenged in the courts, businesses should take steps to measure and minimize antitrust risk under the FTC’s new interpretation of Section 5.

On November 10, 2022, the FTC issued new guidance “regarding the scope of unfair methods of competition under Section 5 of the Federal Trade Commission Act.” This new policy statement follows the FTC’s rescission of its 2015 policy statement, which announced that the FTC would apply Section 5 using “a framework similar to the rule of reason.” In rescinding the 2015 policy statement, FTC Chair Lina M. Khan, joined by Commissioners Rohit Chopra and Rebecca Kelly Slaughter, expressed the agency’s intent to “combat unfair methods of competition even if they do not violate a separate antitrust statute.” The FTC’s new policy statement shows this was not a hollow threat.

Signaling a clear departure from the FTC’s prior guidance, the policy statement announces that the agency will go beyond the rule of reason and consumer welfare standards that previously guided Section 5 analyses. “While courts have applied the rule of reason and consumer welfare standards in the context of the Sherman Act, there is no basis in precedent for applying them wholesale to standalone Section 5,” wrote Chair Khan in a statement on the adoption of the new policy, which was also joined by Commissioner Slaughter and Commissioner Alvaro M. Bedoya.

The new policy statement also grants the FTC broad-sweeping power to act “against conduct that is unfair.” To support the FTC’s interpretation of Section 5, the policy statement provides an overview of the statute’s legislative history, and argues that the “FTC’s authority extends not only to ‘the letter,’ but also to ‘the spirit’ of the antitrust laws.”

The policy statement provides a two-part test to identify whether conduct constitutes an unfair method of competition:

  • First, the conduct must be a “method of competition,” defined as “conduct undertaken by an actor in the marketplace–as opposed to merely a condition of the marketplace, not of the respondent’s making.”
  • Second, the method of competition must be unfair, defined as “conduct [that] goes beyond competition on the merits.”

Two criteria will determine whether the FTC deems conduct unfair:

  • First, whether the conduct is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature.” Unsurprisingly, the FTC also includes catch-all language for “otherwise restrictive or exclusionary” conduct.
  • Second, “the conduct must tend to negatively affect competitive conditions.”

The policy statement goes on to sharply limit potential justifications for unfair methods of competition, requiring businesses to show that any restriction “is narrowly tailored to limit any adverse impact on competitive conditions” and any “benefits outweigh the harm” to market participants.

Finally, the FTC lists “non-exclusive” examples of conduct that it considers unfair methods of competition, such as “mergers or acquisitions that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.” The list also includes “conduct by a respondent that is undertaken with other acts and practices that cumulatively may tend to undermine competitive conditions in the market.”

The policy statement was approved by a 3-1 vote and has not been spared from criticism. In her dissent, Commissioner Christine S. Wilson stated, “[t]he Policy Statement adopts an ‘I know it when I see it’ approach premised on a list of nefarious-sounding adjectives, many of which have no antitrust or economic meaning.” Sean Heather, Senior Vice President for International Regulatory Affairs & Antitrust at the U.S. Chamber of Commerce, joined in the criticism, decrying that “[t]his leaves the FTC with carte blanche control over the economy, allowing it on a whim to decide whatever it feels might be unfair.”

The legal impact of the policy statement remains to be seen, as it likely will be challenged in the courts. The FTC has made clear, however, that it intends to aggressively target conduct it deems unfair, even if not considered a violation of the Sherman and Clayton Acts. Businesses should take heed of this new guidance and carefully assess whether the policy statement creates antitrust risk.

Attorneys in Ballard Spahr’s Antitrust and Competition Group are available to advise businesses on the effects of this new development on their current policies and practices. Please contact us for more information.

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