FTC Increasing Pressure on “Unfair” Methods of Competition Through New Enforcement Policy

Authors:  Bernard (Barry) A. Nigro Jr., Nathaniel L. Asker, Megan C. Ingram.  Special thanks to Madison Chajson and Lexi Michaud, Antitrust and Competition Law Clerks, for their valuable assistance in the research and drafting of this client alert.

In the latest of a series of efforts to broaden antitrust enforcement,[1] the Federal Trade Commission recently redefined its interpretation of “unfair methods of competition” under Section 5 of the FTC Act. In the past, the FTC and the courts have generally limited application of Section 5 to conduct that contravenes other antitrust laws. With this new policy, however, the FTC intends to employ Section 5 to “reach[] beyond” the scope of other antitrust laws and target “incipient violation[s]” and violations of “the spirit of the antitrust laws.”[2]

The policy outlines two criteria[3] for determining whether conduct constitutes an unfair method of competition that the FTC will “weigh[] according to a sliding scale.” First, the conduct is evaluated based on an “indicia of unfairness,” such as whether it is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature.”[4] Second, the conduct at issue “must tend to negatively affect competitive conditions,” such as “raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.”[5] The key is whether the conduct tends to harm competitive conditions. According to the FTC, whether actual harm can be established is not determinative.

By targeting practices in their “incipiency” based on their tendency to harm competitive conditions, the FTC intends to prohibit conduct it may not have otherwise been able to address, such as: interlocking directors or board observers of competing firms not covered by other antitrust laws; mergers, acquisitions, and joint ventures that may ripen into violations of the antitrust laws, including series of acquisitions that individually may not have risen to the level of anticompetitive conduct; and mergers or acquisitions of nascent competitors that may tend to lessen current or future competition.

Prior to this policy statement, the FTC required that corporate practices “cause, or be likely to cause, harm to competition” to be condemned under Section 5.[6] By focusing on incipient behavior, the FTC is seeking to reduce reliance on economic analysis, such as market power or market definition, traditionally at the core of evaluating antitrust law violations. Similarly, the policy extends beyond protecting consumer welfare in order to protect “workers or other market participants” as well. Echoing these sentiments, Commissioner Christine S. Wilson released a 20-page dissent condemning the new policy as “reject[ing] longstanding antitrust policies and legal precedent” in favor of attacking “essentially any business conduct it finds distasteful.”[7]

While the policy also lays out potential affirmative defenses, the bar that companies will have to clear to justify their conduct is high. Companies relying on justifications will have to establish that their conduct results in procompetitive benefits in the same market where the harm occurs and that their conduct has been narrowly tailored to limit any impact on competitive conditions. They will also have to prove that the justifications they are relying on were recognized in previous standalone Section 5 cases (targeting conduct exclusively under Section 5) and outweigh the alleged harm—despite the limited nature of standalone Section 5 precedent and the fact that the FTC need not establish the alleged harm with any certainty.

Ultimately, the policy seeks to broaden the reach of the antitrust laws to prohibit business practices that the FTC considers unlawful yet unaddressed by other antitrust laws. Importantly, however, the FTC’s policy is not law. No judge—whether FTC administrative law judge or federal judge—is required to apply this policy to future cases. Just as the FTC has discretion to release a policy that aims to expand the scope of Section 5, so too do the courts have the power to depart from the FTC’s interpretation of the antitrust laws. Courts will likely be, as they have been in the past, hesitant to summarily condemn conduct as anticompetitive without considering the likely effects of the relevant conduct and procompetitive justifications generally. However, the policy illustrates the FTC’s intent to increase the challenges it brings forward using Section 5 alone and its expanded scope.

Going forward, companies should be mindful that agencies are broadening the scope of conduct that constitutes unfair competitive practices, and should seek antitrust counsel when engaging in behavior that may prompt questions from agencies—even if that behavior has not raised questions in the past.