For more than 100 years, Section 5 of the Federal Trade Act has been the primary source of the Federal Trade Commission’s competition enforcement authority. It gives the FTC broad power to pursue activities that might not rise to the standards written into other laws that the Justice Department uses for its own antitrust enforcement, but need attention from regulators nevertheless.
Now regulatory compliance professionals have a bit more clarity on just how broad that broad power is.
At the end of August, for the first time in its history, the FTC issued a “Statement of Enforcement Principles” outlining the scope of its Section 5 authority. Many had long clamored for such a document: businesses, trade groups, members of Congress. Joshua Wright, a Republican commissioner who stepped down days after the guidance was issued, described its release as a capstone to his career there. FTC Chairman Edith Ramirez called it an agency “milestone.”
Great news. So, um, why are so many people unhappy?
For starters, the brief guidance lacks much of what the business community was hoping for—specificity, examples, and safe harbors. Yes, perhaps the guidance could curb the outer limits of the FTC’s Section 5 enforcement. Then again, cynics fear that its brevity and lack of detail could ultimately empower the agency to pursue more cases in either court or administrative proceedings.
Count Carl Hittinger, litigation group coordinator for the law firm Baker Hostetler, is among the disappointed. “No examples were provided as to the types of conduct that would be illegal or legal, as has been done in the past with the majority of other guidelines issued by the FTC,” he says. The lack of specificity “may have opened the floodgates for more, not less, Section 5 litigation.”
To find examples of conduct illegal under Section 5, one has to refer to a speech Ramirez gave at George Washington University Law School on Aug. 13, the day the Statement of Enforcement Principles was released. The examples include invitations to collude and the exchange of non-price competitive information.
The guidance clarifies that the FTC’s expansive view of its Section 5 authority includes conduct that may not violate other antitrust laws (principally the Sherman Act or the Clayton Act), but could evolve into an antitrust violation involving restraint of trade, monopolization, or “substantial lessening of competition.”
In particular, the FTC guidance focuses on “unfair methods of competition” that threaten competition or the competitive process, and might fall through the cracks of the Sherman and Clayton acts. It reaffirms that, in deciding whether to bring a stand-alone Section 5 claim, the FTC will be guided by three principles: promoting consumer welfare; evaluating commercial practices by focusing on harm to competition or the competitive process, while accounting for pro-competitive benefits; and determining whether either the Sherman or Clayton acts is sufficient to address the competitive concern at issue.
“While the FTC has recognized it’s no longer feasible to suggest it has authority under Section 5 beyond the traditional antitrust laws without providing guidance as to how it views that authority’s limits, this guidance is disappointing as it fails to establish an objective standard that closes the door to varying interpretations,” says Sean Heather, executive director for antitrust at the U.S. Chamber of Commerce.
“No examples were provided as to the types of conduct that would be illegal or legal, as has been done in the past with the majority of other guidelines issued by the FTC.”
Carl Hittinger, Litigation Group Coordinator, Baker Hostetler
“Open-ended authority is not what Congress intended when it created the FTC to be a sister competition agency to the Department of Justice,” he adds. “Enforcement of the antitrust laws should be predictable and consistently applied, regardless of whether the FTC or the [Justice Department] is investigating competition concerns.”
Maureen Ohlhausen, a Republican appointee to the FTC, was the lone dissenting vote against the guidance and voiced similar concerns. She described it as “too abbreviated in substance and process,” leaving more questions than answers.
“The Commission’s official embrace of such an unbounded interpretation of unfair methods of competition is almost certain to encourage more frequent exploration of this authority in conduct and merger investigations and standalone Section 5 enforcement,” she said in a statement. “The possibilities for expansive use of Section 5 under this policy statement appear vast.”
Judicial v. Administrative
Other antitrust laws are equally sparse, but case law has shaped their parameters, says Joel Chefitz, a partner with the law firm McDermott Will & Emery. “The courts have interpreted what the Sherman Act means, what an unreasonable restraint of trade means, and what an agreement means,” he says. “It seems that the FTC is saying that they want to see a continued evolution of Section 5 in much the same way. The flaw in that comparison is that so few of those enforcement actions actually go to court; almost all of them are settled administratively.”
The FTC’s Statement of Enforcement Principles might signal an “effects-based analysis” when applying Section 5, says David Meyer, a partner with Morrison Foerster and a former antitrust official in the Justice Department. That could nudge the FTC’s approach closer to the European Union’s line of thinking: based on whether certain business behaviors make the marketplace less competitive, regardless of any specific offense or any harm (or benefit) to consumers and beyond other legal standards in the Federal Trade Act.
WORTH THE WAIT?
The following is from the Federal Trade Commission’s Statement of Enforcement Principles regarding “unfair methods of competition” Under Section 5 of the FTC Act.
Section 5 of the Federal Trade Commission Act declares “unfair methods of competition in or affecting commerce” to be unlawful. 15 U.S.C. § 45(a)(1). Section 5’s ban on unfair methods of competition encompasses not only those acts and practices that violate the Sherman or Clayton Act but also those that contravene the spirit of the antitrust laws and those that, if allowed to mature or complete, could violate the Sherman or Clayton Act.
Congress chose not to define the specific acts and practices that constitute unfair methods of competition in violation of Section 5, recognizing that application of the statute would need to evolve with changing markets and business practices. Instead, it left the development of Section 5 to the Federal Trade Commission as an expert administrative body, which would apply the statute on a flexible case-by-case basis, subject to judicial review. This statement is intended to provide a framework for the Commission’s exercise of its “standalone” Section 5 authority to address acts or practices that are anticompetitive but may not fall within the scope of the Sherman or Clayton Act.
In deciding whether to challenge an act or practice as an unfair method of competition in violation of Section 5 on a standalone basis, the Commission adheres to the following principles:
The Commission will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare;
The act or practice will be evaluated under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and
The Commission is less likely to challenge an act or practice as an unfair method of competition on a standalone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.
“You can identify a whole host of acts and practices that have consequences for the way in which markets perform,” Meyer says. “What about unilaterally-adopted decisions about how to price to different classes of customers? Or talking to analysts about your future plans with respect to capacity, so that they are not worried you are going to over spend billions of dollars on assets that you might not need? There are all kinds of things an aggressive commission, looking only at the economic effects, might say are anti-competitive.”
While some fear the guidance could lead to more enforcement actions, Barry Nigro, chair of the law firm Fried Frank’s antitrust department and former deputy director for the FTC’s Bureau of Competition, has a more measured take.
“I am sure there will be a desire to go out and test-drive the new policy statement, but I don’t know that it means there is going to be a marked increase in enforcement,” he says. “On the other hand, I wouldn’t be surprised if people are looking at it, reading things into it, and will bring more potential matters to the Commission to consider.” Complaints made to the FTC are a primary source of its enforcement actions, he says, and public perceptions that the FTC is “broadening its view of what might offend the antitrust laws” could drive more complaints to be made.
The FTC’s Section 5 authority remains “a wildcard,” says Steve Cernak, a member of Schiff Hardin’s antitrust and trade regulation team and former lead competition law counsel for General Motors. “There are enough weasel words in there that whatever little guidance it provided with one hand it took away with the other with qualifying statements,” he says.
Cernak is hopeful that greater clarity on Section 5 will emerge from future speeches by commissioners. “We may continue to get more tea leaves to read,” he says. “I don’t think we have heard the last of the questions about how broad Section 5 is. The terms of the debate have just changed a little bit.”