FTC Expands Scope of FTC Act Section 5 Enforcement | Practical Law

FTC Expands Scope of FTC Act Section 5 Enforcement | Practical Law

The Federal Trade Commission (FTC) issued a statement summarizing its views on the scope of Section 5 of the FTC Act (15 U.S.C. §45), entitled the Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act. The FTC adopts a broad view of the range of conduct that can be challenged as unfair competition under Section 5. The policy statement supersedes all prior FTC statements and guidance on Section 5, including a 2015 policy statement which adopted a much narrower view of Section 5's scope, and which the FTC withdrew in 2021.

FTC Expands Scope of FTC Act Section 5 Enforcement

Practical Law Legal Update w-037-5564 (Approx. 5 pages)

FTC Expands Scope of FTC Act Section 5 Enforcement

by Practical Law Antitrust
Published on 10 Nov 2022 • USA (National/Federal)
The Federal Trade Commission (FTC) issued a statement summarizing its views on the scope of Section 5 of the FTC Act (15 U.S.C. §45), entitled the Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act. The FTC adopts a broad view of the range of conduct that can be challenged as unfair competition under Section 5. The policy statement supersedes all prior FTC statements and guidance on Section 5, including a 2015 policy statement which adopted a much narrower view of Section 5's scope, and which the FTC withdrew in 2021.
On November 10, 2022, the Federal Trade Commission (FTC) issued a statement describing its views on the scope of the antitrust prong of Section 5 of the FTC Act (15 U.S.C. §45), which prohibits unfair methods of competition (the Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act (2022 Statement)).
There is little legal precedent that governs the outer boundary of Section 5. As a result, antitrust policymakers have frequently debated its reach. The 2022 Statement indicates that the current FTC takes a broad view of the scope of Section 5, reaching a wide variety of conduct that would not be prohibited under current interpretations of the Sherman Act and Clayton Act.
The 2022 Statement supersedes all prior FTC statements and guidance on Section 5, including the 2015 Statement of Enforcement Principles Regarding "Unfair Methods of Competition" under Section 5 of the FTC Act, which the FTC withdrew in 2021. The 2015 statement outlined a much narrower view of the scope of Section 5.
The 2022 Statement outlines the key principles the FTC uses in determining whether conduct is an unfair method of competition, the standards that should apply to assessing violations of Section 5, and examples of conduct that Section 5 could prohibit.
Companies should be cautious about engaging in conduct that may fall within the scope of the 2022 Statement, particularly if they are operating in industries such as tech, health care, and private equity, that have been FTC enforcement priorities. The FTC will rely on the 2022 Statement as the basis of new enforcement actions. Ultimately, however, any FTC enforcement action must withstand review by federal courts, which may be skeptical of the expansive view of Section 5 taken by the FTC.

Factors Used to Determine Unfair Methods of Competition

The 2022 Statement states that, to violate Section 5, conduct must be:
  • A method of competition, which is limited to conduct by a marketplace actor and does not include marketplace conditions (such as barriers to entry). The FTC stated that, as an example, misusing regulatory processes, like standard setting, is a method of competition.
  • Unfair, meaning that it goes beyond competition on the merits.

Competition on the Merits vs. Unfair Competition

The FTC stated that competition on the merits may include:
  • Better products or services.
  • Business acumen.
  • Truthful marketing and advertising.
  • Innovation.
  • Better employment terms.
To consider whether conduct goes beyond competition on the merits, the FTC will consider two key criteria, including whether conduct:
  • Coerces, exploits, deceives, or similarly leverages economic power.
  • Negatively affects competitive conditions, including by foreclosing or reducing competition, limiting choice, or otherwise harming consumers.
The FTC stated that the second criterion does not require actual consequences, and will be satisfied if the conduct tends to generate negative consequences such as raised prices, reduced output or quality, limited choice, reduced innovation, or reducing the likelihood of competition.
The FTC noted that the two criteria will be evaluated on a sliding scale and may violate Section 5 even if not facially unfair. Additionally, the FTC noted that Section 5 violations do not require a separate showing of market power or market definition if conduct is shown to negatively affect competition.

Limited Justifications

The 2022 Statement states that if the FTC finds that conduct is prima facie an unfair method of competition, the actor will be found liable absent evidence of a cognizable justification. However, the 2022 Statement implies that there are few of these, noting that case law providing cognizable justifications for Section 5 violations is slim and some courts have refused to consider them.
The 2022 Statement states that facially unfair conduct cannot be justified by a party obtaining pecuniary benefits and the FTC will not evaluate justifications based on cost-benefit analyses. Submitted justifications might be evaluated using non-quantifiable terms, including the nature of the harm and who shares in the purported benefits.
Other limitations on potential justifications include that the justification must:
  • Be legally cognizable in standalone Section 5 cases.
  • Not be pretextual.
  • Show that the restriction is narrowly tailored to limit negative impact on competitive conditions.
  • Not include benefits outside of the market where harm occurs.
  • Outweigh the conduct's harm.

Examples of Unfair Methods of Competition

The 2022 Statement includes a non-exclusive list of conduct that may violate Section 5, including:
  • Violations of the antitrust laws.
  • Incipient violations of the antitrust laws, including:
    • invitations to collude;
    • mergers, acquisitions, or joint ventures that become antitrust law violations or bring about harm that the antitrust laws are intended to prevent; and
    • loyalty rebates, tying, bundling, and exclusive dealing arrangements that become antitrust law violations because of the actor's position in the market.
  • Conduct that violates the spirit of the antitrust laws, even though the laws do not literally prohibit the conduct. Examples of this type of conduct include:
    • facilitating tacit coordination;
    • harmful parallel exclusionary conduct;
    • multiple courses of conduct that cumulatively undermine market competition;
    • price discrimination not covered by the Clayton Act, including related to inducing promotional allowances;
    • de facto tying, bundling, exclusive dealing, or loyalty rebates using market power to affect the same or a related market;
    • mergers, acquisitions, or joint ventures that bring about harm that the antitrust laws are intended to prevent;
    • mergers or acquisitions of a nascent competitor that injures current or future competition;
    • leveraging market power to gain an advantage in an adjacent market, including by exploiting lock-in effects;
    • conduct that is direct evidence of harm or likely harm to competition without relying on market definition;
    • interlocking directorates not covered by the Clayton Act;
    • using commercial bribery or corporate espionage to gain or maintain market power;
    • false or deceptive advertising or marketing to gain or maintain market power; or
    • discriminatory refusals to deal that tends to gain or maintain market power.
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