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FTC Announces a Significant Expansion of What It Considers Unfair Methods of Competition Under Section 5 of the FTC Act

November 18, 2022

FTC Announces a Significant Expansion of What It Considers Unfair Methods of Competition Under Section 5 of the FTC Act

November 18, 2022

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Although the Policy Statement is very important for businesses to be aware of, it is not law. It indicates how the FTC intends to enforce Section 5.

On November 10, 2022, the Federal Trade Commission (FTC) issued a policy statement that significantly expands the scope of what the FTC considers “unfair methods of competition” under Section 5 of the FTC Act (the “Policy Statement”). The announcement comes more than a year after the FTC rescinded its previous policy against pursuing “standalone” Section 5 Unfair Methods of Competition claims and interpreting Section 5 as coextensive with the Clayton and Sherman Acts. The Policy Statement appears to align with FTC Chair Lina Khan’s goal of increasing enforcement of conduct the FTC deems to be unfair regardless of whether it violates the Sherman and Clayton Acts.

Section 5 of the FTC Act prohibits, among other things, “unfair methods of competition in or affecting commerce.” According to the Policy Statement, “Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.” The FTC intends the Policy Statement to assist the public, the business community and antitrust practitioners by articulating when business practices will constitute unfair methods of competition under Section 5; however, it only outlines the “most significant general principles concerning whether conduct is an unfair method of competition,” leaving substantial room for interpretation. In stark contrast to the previous 2015 Statement of Policy, which leaned on existing antitrust law and court interpretations, the Policy Statement and its long list of conduct that may be challenged increases uncertainty as to what conduct is lawful and is an expansive declaration that businesses cannot rely on the courts’ interpretations.

In an attempt to provide guidance on business conduct that the FTC considers “unfair methods of competition,” the FTC provided two general guideposts. First, the conduct must be a method of competition and not simply a market condition that is outside of a particular respondent’s control. Second, the FTC will determine whether the method of competition is “unfair” using a sliding scale based on the following two factors:

  1. Whether conduct is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involves the use of economic power of a similar nature,” or is “otherwise restrictive or exclusionary.”
  2. Whether conduct “tends to negatively affect competitive conditions,” which “may include, for example, conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers.”

According to the Policy Statement, the more the conduct at issue falls under the first factor, the less it needs to fall under the second factor, and vice versa, to be considered an unfair method of competition under Section 5. This very high-level rubric abandons several different analyses that businesses have used for decades to ensure that their conduct is not anticompetitive, including traditional notions of market definition, competitive effects and the rule of reason. Indeed, the Policy Statement actually states that the FTC will not need to show any actual harm to competition or consumers to establish a violation. As a result, the type of conduct that could be pursued under this interpretation of “unfair methods of competition” is broad, includes conduct that does not otherwise violate the antitrust laws, and will be unpredictable to assess. For example, non-compete clauses and other restrictive covenants that otherwise comply with the antitrust laws may draw scrutiny from the FTC – which is an enforcement area that the agency has signaled interest in since the beginning of President Biden’s administration.

In addition, in a nod to concerns the FTC has noted regarding serial acquisitions by platform technology companies and by private equity industry aggregators, the Statement of Policy suggests that a series of mergers and acquisitions that individually do not violate the Clayton Act may be “incipient violations of the antitrust laws” or “[c]onduct that violates the spirit of the antitrust laws” subject to challenge under Section 5. Other conduct that is the subject of extensive precedent in the courts under the Sherman Act and Clayton Act which may be challenged as unfair competition under the Statement of Policy includes otherwise lawful rebates, tying, bundling, exclusive dealing, seeking promotional allowances and parallel conduct in the absence of an agreement.

The Policy Statement was issued on a partisan 3-1 vote of the commissioners. Republican Commissioner Christine Wilson issued a scathing 20-page dissenting opinion, sharply criticizing the policy as “the work of an academic or a think tank fellow who dreams of banning unpopular conduct and remaking the economy.” Her main critique is that the policy is overbroad in its reach and that it fails to provide useful guidance to businesses and those who advise them as to what type of conduct is unlawful under Section 5. Commissioner Wilson also disapproved of the Policy Statement to the extent that it disavows the consumer welfare standard and seeks to protect competitors and employees, instead of competition, while ignoring the legislative history and interpretation of the term “unfair” in the consumer protection context under Section 5.

Commissioner Wilson also criticized the fact that the FTC issued the Policy Statement outside of the notice-and-comment rulemaking process. She noted that the FTC’s authority has faced recent attacks, including challenges to its internal adjudicative process, and that the lack of public comment could undermine the Policy Statement specifically and the FTC generally.

Although the Policy Statement is very important for businesses to be aware of, it is not law. It indicates how the FTC intends to enforce Section 5. It remains to be seen whether courts will agree with the FTC’s interpretation. Companies should consult with experienced counsel to help them navigate this rapidly changing landscape.

For More Information

If you have any questions about this Alert, please contact Sean P. McConnell, Christopher H. Casey, Brian H. Pandya, Sarah O'Laughlin Kulik, any of the attorneys in our Antitrust and Competition Group, Lawrence H. Pockers, Shannon Hampton Sutherland, any of the attorneys in our Non-Compete and Trade Secrets Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.