Legal policy
The Commission’s broad new approach to Section 5 outlined in the Statement is of no surprise given recent commentary. It describes “the most significant general principles” the FTC will use to determine whether conduct will fall under the scope of Section 5. First, the conduct must be a “method of competition” that is “conduct undertaken by an actor in the marketplace” – as opposed to a marketplace condition such as high concentration that is not due to the actor’s conduct – that implicates competition. The Commission further notes that conduct that only indirectly implicates competition may nevertheless be prohibited by Section 5. Second, the conduct must be unfair, meaning that “the conduct goes beyond competition on the merits.” To evaluate this, the Commission will consider two key criteria: (1) whether the conduct is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature...[or is] otherwise restrictive or exclusionary”; and (2) whether the conduct “tend[s] to negatively affect competitive conditions.” The Commission will weigh these criteria on a sliding scale, taking into account the size, power, and purpose of the actor, as well as the current and potential future effects. Consistent with the Commission’s recently announced strategic goals and objectives, it will look at the conduct’s tendency to negatively affect consumers, workers, and other market participants. This inquiry does not require proof of actual harm. Rather, the FTC will investigate whether conduct has a tendency to reduce the likelihood of potential or nascent competition.
The Statement also addresses whether certain purported justifications by alleged violators may constitute affirmative defenses to Section 5. The Commission first concludes that it would be contrary to Section 5 to justify facially unfair conduct on the grounds that it provides the actor with pecuniary benefits. At the same time, where there are purported benefits to market participants, these may be relevant even if the harmed party also shares in such benefits. Further, certain established limitations on antitrust defenses still apply, such as that it is the party’s burden to show that the justification is legally cognizable and non-pretextual, that any restriction is narrowly tailored to limit adverse impacts on competition, and that the asserted benefits are not outside the market where the harm occurred. The party will still have the burden to show that the asserted benefits outweigh the harm and are the kind recognized by previous stand-alone Section 5 cases.
Finally, the Commission provided a nonexclusive list of broad examples of unfair methods of competition:
- Practices deemed to violate the Sherman and Clayton Acts (the antitrust laws);
- Incipient violations of the antitrust laws; and
- Conduct that violates the spirit of the antitrust laws.
Additional examples can be found in the Statement, but the Commission’s broad examples fail to provide specific guidance on what conduct will be in bounds versus out of bounds of Section 5, leaving businesses without a compass to navigate the new framework.
Strong dissent
The FTC voted to approve the Statement 3-1, with Commissioner Christine Wilson voting “no” and issuing a strong 20-page dissent. In her view, the Statement “announces that the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful[,]” instead of providing meaningful guidance. She criticized the Statement’s choice to provide an academic analysis subject to political interpretation instead of workable rules. In particular, Wilson condemns the fact that the Statement:
(1) Abandons the rule of reason in favor of a “near-per se approach”;
(2) Repudiates the consumer welfare standard and instead protects inefficient competitors; and
(3) Rejects precedent that requires the FTC to consider the anticompetitive effects, business justifications, and procompetitive effects of the conduct.
Commissioner Wilson further criticized the Statement’s use of labels without clear definitions and lack of “workable rules for businesses.”
Key takeaways
While only time will tell how the Statement will shape the scope and enforcement pursuant to Section 5, a few guiding principles likely will be an FTC focus in 2023. Because the Statement applies across all industries, it is critical for businesses to understand how the Commission may scrutinize both business practices and deals moving forward under this framework.
First, the Commission will read Section 5 broadly to reach further than the antitrust laws and to apply to conduct different from that prohibited by the Sherman and Clayton Acts. Following on the heels of the July 2021 withdrawal of the previous policy statement, the Commission will now use Section 5 to target conduct that falls within “the spirit” of the antitrust laws, not just the letter of the law. Exactly what that is and whether companies will have any defenses to conduct reviewed pursuant to Section 5 is yet to be determined. Based on the plain language of the Statement, the FTC will need to show very little to meet its burden and will expect high deference from the courts, while businesses will have limited ability to argue the procompetitive benefits of the challenged conduct.
Next, the FTC will pursue “incipient” violations, looking at conduct that may harm competition in the future without a finding of current anticompetitive harm or intent. This means that the Commission may target methods of “unfair competition” that occur before a firm gains significant market power or actions that do not reflect anticompetitive intent. The Commission was not shy to indicate in the Statement that it expects deference from the courts on such interpretations of Section 5.
Finally, the Statement may leave businesses with more questions than answers about what conduct will be targeted by the Commission, how long investigations may take, and whether they will be heard at all on their business justifications.
Given the uncertainty in this area of the law, it is critical to consult with experienced antitrust counsel to navigate the murky waters of Section 5’s scope and enforcement. Reed Smith will continue to monitor developments regarding the FTC’s enforcement of Section 5.
Client Alert 2022-375
