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FTC Resets Interpretation of Section 5, Promising Reinvigorated Approach to Combating Unfair Methods of CompetitionNovember 16, 2022
On November 10, 2022, the US Federal Trade Commission (“FTC”) released a Policy Statement clarifying its new, expansive interpretation of its mandate to enforce Section 5 of the FTC Act. In a sharp reversal of a 2015 Policy Statement, the FTC now makes clear that it interprets Section 5 to extend beyond the scope of the Sherman and Clayton Acts to reach “unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.” (emphasis added).
The Policy Statement includes three notable shifts from prior practice. First, to be unfair, the conduct need not “directly cause actual harm in the specific instances at issue.” (emphasis in original). Second, the Policy Statement outlines a narrow view of potentially cognizable justifications. Both are key departures from the “rule of reason” approach, which requires some showing of anticompetitive harm and balancing anticompetitive effects against any procompetitive benefits of the conduct at issue. Third, by recognizing effects not just on consumers but also on employees, competitors, and other market participants, the Commission applies a broader lens than the traditional consumer welfare standard.
Moving forward, businesses can expect robust enforcement activity and should be aware that the FTC will consider not only whether business practices violate the antitrust laws, but also whether those practices have any “tendency” to harm competitive conditions—a fact-intensive and enforcement-oriented inquiry.
History of the Federal Trade Commission Act, Section 5
Congress passed the Federal Trade Commission Act in 1914, creating the FTC and giving it “standalone” authority to bring actions under Section 5 to “prevent persons from using unfair methods of competition . . . and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45.
For over a hundred years after its creation, the FTC had never defined what it determined to be an “unfair” practice in violation of Section 5; it largely relied upon the courts to define the scope and limits of its authority. In 2015—for the first time in the FTC’s history—it released a Policy Statement in which it announced that it would formally align its Section 5 enforcement with the Sherman and Clayton Acts. The 2015 Statement decreed that the FTC would interpret its Section 5 authority under a “rule of reason” framework and challenge practices that “cause, or [are] likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications[.]” The 2015 Statement also affirmed the FTC’s adherence to the consumer-welfare standard and its attendant focus on price, output, and quality in making enforcement decisions.
Then, in July of 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy, in which he announced his intention to reverse what he characterized as an era of relaxed antitrust enforcement. The Biden Administration laid the blame for increased concentration and diminished competition at the feet of “Federal Government inaction,” and promised a cure in the form of “enforce[ment of] the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony,” and specifically to “meet the challenges posed by new industries and technologies.” The Executive Order “encouraged” the FTC “to enforce the antitrust laws fairly and vigorously” and to use its authority to “further the policies set forth” therein.
Revising the FTC’s Interpretation of its Section 5 Authority
Just a few days before President Biden issued that Executive Order, the FTC formally withdrew the 2015 Policy Statement. More than a year later, the FTC has now announced that it is returning to the more vigorous, pre-2015 interpretation of its Section 5 enforcement authority to police “unfair methods of competition in or affecting commerce.” 15 U.S.C. § 45(a)(1). The 2022 Policy Statement marks a substantial shift from the agency’s 2015 interpretation, indicating that the Commission will take a much more expansive view of its power under Section 5. Notably, the Policy Statement begins with the definitive assertion that “Section 5 [of the FTC Act] reaches beyond the Sherman and Clayton Acts[.]” See also F.T.C. v. Sperry & Hutchinson Co., 405 U.S. 233, 239 (1972) (“empower[s] the Commission to define and proscribe an unfair competitive practice, even though the practice does not infringe either the letter or the spirit of the antitrust laws”).
The Policy Statement explicitly rejects the “rule of reason” approach—which required some showing of anticompetitive harm—in favor of a “focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.” (emphasis added).
In the new Policy Statement, the FTC identifies a three-part framework to guide the analysis of conduct under Section 5:
- First, the conduct must be a “method of competition,” “as opposed to merely a condition of the marketplace, not of the respondent’s making[.]”
- Second, the conduct must be “unfair,” which means that it must “go beyond competition on the merits.” The FTC will apply two criteria for this factor: first, the conduct must be “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature;” and second, it “must tend to negatively affect competitive conditions.” In a notable shift from the prior policy, the Statement makes clear that identifiable competitive harm is not a necessary predicate for a Section 5 violation: “[b]ecause the Section 5 analysis is purposely focused on incipient threats to competitive conditions, this inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue.” (emphasis in original). Instead, the FTC will now consider “whether the respondent’s conduct has a tendency to generate negative consequences.” (emphasis added).
- Third, the FTC will afford any Section 5 respondent an opportunity to assert legitimate justifications for its conduct. But respondents will bear the “burden to show that the asserted justification for the conduct is legally cognizable, non-pretextual, and that any restriction used to bring about the benefit is narrowly tailored to limit any adverse impact on competitive conditions.” Also, unlike the traditional rule of reason framework, where the plaintiff bears the burden of showing that competitive harm substantially outweighs procompetitive benefits, it will be the respondent’s “burden to show that, given all the circumstances, the asserted benefits outweigh the harm.”
In an effort to provide some guidance on the categories of conduct that will violate Section 5, the 2022 Policy Statement makes clear that the FTC will now hew more closely to the “case law and . . . FTC experience,” and it includes a non-exhaustive list of examples of conduct that “constitute incipient violations of the antitrust laws or that violates the spirit of the antitrust laws.” The list includes traditional Sherman and Clayton Act violations as well as “conduct . . . [that] may or may not be covered by the literal language of the antitrust laws or that may or may not fall into a ‘gap’ in those laws,” including, among other things:
- “[M]ergers, acquisitions, or joint ventures that have the tendency to ripen into violations of the antitrust laws,”
- “[L]oyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws,”
- “[P]arallel exclusionary conduct that may cause aggregate harm,”
- “[F]raudulent and inequitable practices that undermine the standard-setting process;”
- “[U]sing market power in one market to gain a competitive advantage in an adjacent market by, for example, utilizing technological incompatibilities to negatively impact competition in adjacent markets,” and
- “[D]iscriminatory refusals to deal which tend to create or maintain market power.”
Criticism of the New Policy
Commissioner Christine Wilson vigorously dissented from the issuance of the new Policy Statement. She criticized it on three grounds, arguing that (1) it abandons the rule of reason and amounts to a “near per se” rule, (2) it improperly repudiates the consumer welfare standard, and (3) that bringing actions to prevent anticompetitive conduct in its incipiency is a drastic change from recent precedent.
To be sure, the Policy Statement raises more questions than it answers. Businesses should expect the FTC to apply its new interpretation of Section 5 to intervene earlier and with more frequency than before to correct real or perceived incipient competition problems. O’Melveny stands ready to work with clients to analyze Section 5 precedent, to develop guidelines that will enable companies to avoid FTC scrutiny in the first place—especially in adopting new business practices—to use a variety of tools and levers to defend Section 5 enforcement actions when the FTC brings them, and to assist clients who believe that they may be the victim of practices that violate Section 5 and seek redress from the FTC.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Brian P. Quinn, an O’Melveny counsel licensed to practice law in Virginia and the District of Columbia, Patrick J. Jones, an O’Melveny associate licensed to practice law in New York and the District of Columbia, Colleen Powers, an O’Melveny associate licensed to practice law in New Jersey and New York, and Casey Kovarik, an O'Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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