The significantly more expansive interpretation of Section 5 may require businesses to undergo a reassessment of their antitrust compliance policies to account for the increased risk of investigations and enforcement actions with respect to conduct that companies have historically engaged in without incurring material antitrust risk.
The FTC Articulates a Virtually Unbounded View of Section 5
The Policy Statement explicitly states that “Section 5 reaches beyond the Shermanand Clayton Acts [the antitrust laws] to encompass various types of unfair conduct that tend to negatively affect competitive conditions,” and provides guidance as to how the agency intends to pursue such “standalone” unfair methods of competition claims under Section 5. The Policy Statement comes more than a year after the FTC voted in July 2021 to rescind a 2015 Policy Statement providing that the agency’s assessment and enforcement of standalone “unfair methods of competition” under Section 5 would be: (1) guided by the antitrust laws and the promotion of the consumer welfare standard; (2) evaluated under a framework similar to the “rule of reason”; and (3) limited when the Sherman or Clayton Acts are “sufficient to address the competitive harm arising from the act or practice.”
Unfair Methods of Competition
The Policy Statement cites extensively to the legislative history of the 1914 FTC Act and historical case law interpreting the statute to support the thesis that “Congress evinced a clear aim that ‘unfair methods of competition’ need not require a showing of current anticompetitive harm or anticompetitive intent in every case,” and that Section 5 extends to conduct that does not violate the letter of the antitrust laws. The Policy Statement explains that the conduct described in Section 5’s prohibition of “unfair methods of competition in or affecting commerce” must (1) be a “method of competition” undertaken by an actor in the marketplace; and (2) implicate competition, even if only indirectly.
In addition, the FTC will consider conduct to be “unfair” if it goes beyond “competition on the merits.” The FTC will consider two key criteria when determining whether conduct goes beyond competition on the merits: (1) is the conduct coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature, or is the conduct otherwise restrictive or exclusionary; and (2) does the conduct tend to negatively affect competitive conditions by foreclosing or impairing the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers.
The Commission specifies that because the Section 5 analysis focuses “on incipient threats to competitive conditions,” the analysis of whether conduct negatively affects competitive conditions “does not turn to whether the conduct directly caused actual harm in the specific instance at issue.” In addition, the conduct will be evaluated in the aggregate to determine whether it negatively affects “consumers, workers, or other market participants” by raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.
The Commission asserts that Section 5 does not require a separate showing of market power or market definition “when the evidence indicates that such conduct tends to negatively affect competitive conditions.” Accordingly, a Section 5 inquiry will not be limited to a “rule of reason” analysis, but instead will “focus on stopping unfair methods of competition in their incipiency based on their tendency to harm competitive conditions.”
Justifications and Efficiencies
The Commission says that “it would be contrary to the text, meaning, and case law of Section 5 to justify facially unfair conduct on the grounds that the conduct provides the respondent with some pecuniary benefit.” Accordingly, the FTC will not conduct a net efficiencies test or a numerical cost-benefit analysis if a party chooses to assert a business justification defense in a Section 5 case, and it is the party’s burden to show that the justification is legally cognizable, non-pretextual, “narrowly tailored to limit any adverse impact on competitive conditions,” and not outside the market where the harm is alleged to have occurred.
Examples of Unfair Methods of Competition
In addition to conduct that is deemed to violate the antitrust laws, the Commission provides, as guidance, a “non-exclusive” list of examples of conduct that violate Section 5.
Incipient violations of the antitrust laws
The Commission includes within the scope of Section 5 “incipient violations” of the antitrust laws by “respondents who have not gained full-fledged monopoly or market power,” and where the conduct “has the tendency to ripen into violations of the antitrust laws.” Examples of such conduct include loyalty rebates, tying, bundling, and exclusive dealing arrangements. Invitations to collude are also subject to the FTC’s Section 5 authority.
The Commission also articulates an expanded view of its merger enforcement mandate, stating the agency intends to challenge “mergers, acquisitions, or joint ventures that have the tendency to ripen into violations of the antitrust laws,” as well as series of mergers that, when considered together, may be found to bring about harm that violates the antitrust laws even if the individual transactions do not.
Conduct that violates the “spirit of the antitrust laws”
In addition to incipient violations of the antitrust laws, the Commission also cites conduct that “violates the spirit of the antitrust laws,” which it defines to include conduct that “tends to cause potential harm similar to an antitrust violation” but may fall outside the Sherman and Clayton Acts, as violative of Section 5. The FTC identified more than a dozen categories of conduct that violate the “spirit of the antitrust laws,” such as:
- Facilitating practices (i.e., practices that “facilitate tacit coordination”);
- “[P]arallel exclusionary conduct that may cause aggregate harm;”
- Price discrimination claims against buyers not covered by the Clayton Robinson-Patman Act;
- A series of mergers or acquisitions that individually may not have violated the antitrust laws but that “tend to bring about the harms that the antitrust laws were designed to prevent;”
- Mergers or acquisitions of a potential or nascent competitor that “may tend to lessen current or future competition;”
- Leveraging market power in one market to gain a competitive advantage in an adjacent market;
- Without defining a relevant market, conduct that results in direct evidence of harm or likely harm to competition.
Republican Commissioner Christine Wilson Issues Strong Dissent to Expanded Section 5 Authority
Republican Commissioner Christine Wilson issued a 20-page statement articulating her objections to the Policy Statement, arguing that “instead of providing meaningful guidance to businesses . . . [the Policy Statement] announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful.” Commissioner Wilson critiques the Policy Statement for, among other things:
- Abandoning the rule of reason and adopting a “near-per se approach” that discounts business rationales underlying the challenged conduct and the potential efficiencies that the conduct may generate;
- Repudiating the consumer welfare standard to “advance the welfare of inefficient competitors;” and
- Rejecting “a vast body of relevant precedent” that requires the agency to demonstrate the likelihood of anticompetitive effects.
Commissioner Wilson criticizes the “subjective nature” of the adjectives the Policy Statement uses to characterize “facially unfair competition,” arguing that the framework laid out in the statement “violates expectations of fairness” since it “will make it impossible for businesses to know in advance whether their conduct will be considered unfair.”
The Policy Statement reflects a dramatic expansion of the FTC’s understanding of its enforcement authority and discretion, with broad swaths of conduct previously not subject to scrutiny now in the FTC’s sights. Importantly, companies that do not have monopoly power or even market power are now within the scope of Section 5 investigations and enforcement actions.
Yet the FTC’s expansive articulation of its own Section 5 authority is likely to come to a head with what the FTC regards as the agency’s limited resources. It therefore remains to be seen whether, and where, the FTC will choose to focus its enforcement efforts. The Policy Statement itself fails to provide clear guidance with respect to how the FTC will use its enforcement discretion in deciding what cases to bring.
Nor does the Policy Statement provide clear guidance as to how the FTC intends to actually analyze cases it does bring pursuant to Section 5. For example, the Policy Statement provides no guidance with respect to how the FTC intends to evaluate conduct “in the aggregate,” leaving companies wondering how to assess whether they are engaged in practices facilitating tacit coordination or parallel exclusionary conduct that “may cause aggregate harm.” It is also not immediately clear that courts will be receptive to FTC enforcement actions brought under a policy that abandons the consumer welfare standard—and along with it the majority of case law providing relevant guidance with respect to its application—in favor of protecting workers and small businesses.
The Policy Statement also appears to dramatically expand the FTC’s view of its merger enforcement authority—allowing the agency to challenge mergers that have “the tendency to ripen into violations of the antitrust laws,” without demonstrating a likelihood of anticompetitive effects through evidence of market power and market definition. This would result in an entire category of mergers that may violate Section 5 even if they do not violate Section 7 of the Clayton Act. It would also make the decision as to whether the transaction is reviewed by the Department of Justice (DOJ) or the FTC even more significant than it already is.
Given the vast universe of conduct that may now be classified as an “unfair method of competition,” businesses should undertake a comprehensive reassessment of their antitrust compliance policies to ensure these policies address all potential conduct that the FTC considers to be within the jurisdiction of Section 5.
Authored by Logan Breed, Chuck Loughlin, Ilana Kattan, and Jill Ottenberg.
1 15 U.S.C. §1 and §2.
2 15 U.S.C. § 18.
3 15 U.S.C. §45(a)(1).
4 Whether the conduct negatively affects competition will be examined “in the aggregate along with the conduct of others engaging in the same or similar conduct, or . . . as a part of the cumulative effect of a variety of different practices by the respondent.”
5 The rule of reason requires balancing an agreement’s procompetitive and anticompetitive effects. If the anticompetitive effects of the agreement outweigh the procompetitive effects, the agreement is found to be an unlawful restraint of trade.
6 E.g., “coercive,” “exploitive,” “collusive,” “abusive,” “deceptive,” “predatory,” “restrictive,” and “exclusionary.”