Reed Smith Client Alerts

On November 10, 2022, the Federal Trade Commission (FTC or the Commission) released its newest Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act (the Statement). The Statement reflects the Commission’s updated interpretation of Section 5 of the FTC Act (Section 5), 15 U.S.C. § 45, which prohibits “unfair methods of competition.” The Statement signals a major shift in the FTC’s approach to Section 5, making clear that it “reaches beyond the Sherman and Clayton Acts” to encompass incipient conduct that negatively affects competition but is not necessarily made unlawful by the other antitrust statutes. Beyond that, the Statement seems to leave more questions than it answers. In this alert, we summarize the Statement and highlight key takeaways to help guide businesses in navigating the murky waters left from the FTC’s newfound interest in Section 5.

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:

  1. Practices deemed to violate the Sherman and Clayton Acts (the antitrust laws);
  2. Incipient violations of the antitrust laws; and
  3. 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.