In a striking move away from past practice, the FTC has claimed sweeping authority to prohibit conduct as unfair methods of competition under Section 5 of the FTC Act. The agency’s November 10 policy statement argues that Section 5 of the FTC Act extends significantly beyond the traditional scope of the Sherman and Clayton Acts. This follows the FTC’s retraction last year of its 2015 policy statement on the same statute. The new policy focuses on conduct that “tend[s] to negatively affect competitive conditions,” citing a trio of cases from the early 1980s to focus on conduct that “constitutes an incipient violation of the antitrust laws or that violates the spirit of the antitrust laws.”

The FTC’s new focus will target a broad range of business practices, pulled from an expansive reading of historical cases and from new academic theory. The policy emphasizes the inapplicability of restrictive antitrust precedents to Section 5, which may now be used to target acquisitions of potential competitors, technical tying, predatory pricing, and even purely parallel conduct.

It appears the FTC is attempting to assert an additional layer of statutory authority beyond the traditional antitrust laws to condemn harms to competition in their incipiency, and thus lower the FTC’s evidentiary burden in proving a likely harm to competition. While the FTC seeks judicial deference in defining unfair conduct, the agency’s expansive reading for many of the proposed areas would likely face skepticism in the courts, which have carefully set precedent to define the scope of the antitrust laws.

What is an “unfair method of competition”?

In the antitrust context, Section 5 prohibits “unfair methods of competition in or affecting commerce.” The new policy statement breaks down “unfair methods of competition” into just two elements: “unfairness” and “method of competition.” Notably, the statement does not apply a requirement for any anticompetitive effect, nor does it set out any market power thresholds that make anticompetitive effects more likely.

Unfairness is tied to departures from “competition on the merits,” such as “superior products or services, superior business acumen, truthful marketing and advertising practices, investment in research and development that leads to innovative outputs, or attracting employees and workers through the offering of better employment terms.” In a litany of policy objectives that extends far beyond the established focus of the antitrust laws, the statement suggests that unfairness includes coercive, exploitative, collusive, abusive, deceptive, predatory, restrictive, or exclusionary conduct.

The “method of competition” element creates a conduct requirement for violations tied to any aspect of the competitive process. Under the statement, violations of generally applicable laws that provide a cost advantage are not themselves sufficient to be a method of competition. The policy statement also explicitly excludes “conditions of the marketplace” such as structural conditions that could be targeted in a market study in other jurisdictions. Examples of such conditions include the mere existence of high concentration or high barriers to entry within a market.

The FTC justifies the omission of an anticompetitive effect requirement upon Section 5’s emphasis on “incipient” conduct. The statement argued that a requirement to show current anticompetitive harm would undercut Section 5’s aim of stopping “embryonic” monopolies before they manifest. While this includes some conduct that is more established under Section 5, such as invitations to collude on cartel conduct, the statement pushes further into new territory by applying conduct standards designed for firms with market power to firms more broadly. Furthermore, the statement focuses on additional conduct that violates the “spirit” of the antitrust laws but fails to meet the conduct standards established by the courts to give companies clarity and certainty.

The FTC seeks to render certain conduct unlawful that has so far been permissible under other antitrust laws and established precedent. Moving beyond precedent renders conduct permissible under other antitrust laws subject to new enforcement. Arguing that some conduct may fall into gaps in the literal language of the antitrust laws when applying the agency’s expertise, the FTC cites a broad interpretation of cases dating back to the 1960s as historical examples to demonstrate that the following practices are unfair methods of competition:

• conduct short of concerted action, such as public or private invitations to collude, practices that facilitate tacit coordination, or parallel exclusionary conduct;
• mergers that do not violate the Clayton Act, including acquisitions of nascent competitors, serial acquisitions, or non-horizontal mergers where the FTC has faced challenges of proof;
• unilateral conduct without regard to market power, such as tying (including technical tying), bundling, exclusive dealing, loyalty rebates, or discriminatory refusals to deal;
• conduct that resembles—but does not constitute—an antitrust violation, including price discrimination or interlocking directorates not prohibited under the antitrust laws; and
• other unfair conduct that tends to create or maintain market power, including fraudulent and inequitable practices in standard setting, commercial bribery, corporate espionage, or false or deceptive advertising.

Affirmative defenses to Section 5 enforcement are limited under the policy statement, if available at all. The statement indicates that defendants will have the burden of showing that procompetitive benefits outweigh anticompetitive harm. Yet it also casts doubt on whether such a burden could be proven, remarking that both benefits and harms could be unquantifiable and that the FTC would draw upon its expertise to evaluate justifications offered.

In a dissenting statement, Commissioner Christine S. Wilson highlights that the new guidance potentially subjects all businesses to Section 5 enforcement. Furthermore, Commissioner Wilson also observed that the policy statement’s abandonment of the consumer welfare standard removes a clear metric that businesses might have relied upon to predict FTC decisions in lieu of precedent. The U.S. Chamber of Commerce has also criticized the new statement, calling it a “pure political power grab designed to give Chair Khan carte blanche control over when, where, and how companies compete.”

The FTC’s focus on historical precedent is unsurprising given the administration’s efforts to revive other older antitrust theories. Other examples of renewed interest in reviving disused statutory authorities include the Robinson-Patman Act, criminal monopolization charges under Section 2 of the Sherman Act, and the Magnuson-Moss Warranty Act.

What will the courts say?

The courts may not accept the FTC’s new approach towards Section 5. When the FTC brought standalone Section 5 cases in the 1980’s, it repeatedly faced judicial skepticism. As one court observed, “The term ‘unfair’ is an elusive concept” and “standards… must be formulated to discriminate between normally acceptable business behavior and conduct that is unreasonable or unacceptable.” Chair Khan has stated that the new policy statement “mitigates risk” of judicial challenges; but as usual, the courts will have the last word.

The FTC may try to delineate Section 5 violations through administrative rulemaking, but that course of action carries the risk of failure given the likelihood that the Supreme Court will continue to re-evaluate the breadth of power enjoyed by federal agencies. In June, the Supreme Court struck down a carbon emissions plan in West Virginia v. EPA, holding that “a clear statement is necessary for a court to conclude that Congress intended to delegate authority of this breadth to regulate a fundamental sector of the economy.”