The FTC Signals an Unprecedented Expansion in Its Definition of Unfair Methods of Competition

The FTC Signals an Unprecedented Expansion in Its Definition of Unfair Methods of Competition

November 11, 2022, Covington Alert

The U.S. Federal Trade Commission issued a policy statement that dramatically expands the scope of what it considers “unfair methods of competition” under Section 5 of the FTC Act, 15 U.S.C. § 45. This represents an aggressive and unprecedented interpretation of the agency’s authority, and indicates that the Commission plans to use rulemaking and enforcement actions to police a broad set of conduct beyond the scope of the antitrust laws (i.e., the Sherman Act and the Clayton Act).

According to the agency’s press release, the policy statement – issued pursuant to a party-line vote of 3-1 – is intended to “restore the agency’s policy of rigorously enforcing the federal ban on unfair methods of competition” with the stated goal of allowing the agency “to exercise its full statutory authority against companies that use unfair tactics to gain an advantage instead of competing on the merits.” And Chair Lina Khan suggested that the agency will enforce Section 5 to “crack down on unfair methods of competition,” as commanded by Congress when it created the FTC.

The policy statement lays out two elements to a Section 5 violation: (1) the conduct must be a method of competition (2) that is unfair. Most of the action will be around the second prong – unfairness – which the policy statement defines as conduct that goes “beyond competition on the merits.” To determine whether the alleged conduct is fair or unfair, the Commission will evaluate two criteria on a sliding scale (i.e., the more evidence of one, the less the Commission believes that there is need for evidence of the other):

Criterion 1: “[T]he conduct may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature [and i]t may also be otherwise restrictive or exclusionary . . . .”

Criterion 2: “[T]he conduct must tend to negatively affect competitive conditions . . . .”

The Commission will not evaluate these two criteria pursuant to a traditional antitrust rule-of-reason analysis. For example, the FTC claims that it does not need to define a relevant market, provide evidence of market power, or show actual harm. Instead, Commission will focus its inquiry on whether the conduct “has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.” The FTC’s stated goal is to “stop[ ] unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.”

The policy statement provides a “non-exclusive set of examples of conduct that have been found to violate Section 5” and puts them into three categories: (1) practices that violate the Sherman Act and/or Clayton Act, (2) conduct that amounts to an “incipient violation of the antitrust laws,” and (3) conduct that violates “the spirit of the antitrust laws.”

Although cognizable business justifications are discussed in the policy statement, it is not clear how much weight the Commission will afford them. In particular, the policy statement indicates that a company cannot justify “facially unfair conduct” by showing “some pecuniary benefits.” Even where the company presents evidence of cognizable business justification, the analysis of whether those justifications outweigh any harm will not be quantitative because the harms stemming from unfair methods of competition are frequently qualitative and/or not quantifiable.

Commissioner Christine Wilson voted against issuing the policy statement and wrote a dissent. Her primary concern is that the policy statement does not provide any meaningful guidance to businesses as to what actually constitutes an unfair method of competition and instead “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.”

Key takeaways are:

• The policy statement represents a significant expansion of what the FTC considers to be an unfair method of competition.
• The FTC will not analyze unfair methods of competition under the traditional rule-of-reason analysis and, therefore, does not feel obligated to define a relevant market, show that the target-company has market power, or provide evidence of harm.
• The FTC appears to deem conduct that historically has been viewed as procompetitive (e.g., low prices) as violations of Section 5 (e.g., if the agency believes that those low prices are “exploitative” or “impair[ ] other market participants”).
• The Commission appears to be shifting the burden in its investigations onto target-companies to justify conduct that the agency deems unfair.
• This is the FTC’s position on the scope of Section 5; it does not mean courts will interpret Section 5 in this way.

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If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust/Competition practice.