On July 9, 2021, just days into her tenure as Federal Trade Commission (FTC or Commission) Chair, Lina Khan led the Commission’s charge to rescind the agency’s 2015 policy statement (2015 Statement) on its approach to enforcing Section 5 of the FTC Act, which prohibits “unfair methods of competition.” Less than a year and a half later, on November 10, 2022, the Commission followed up with a new policy statement (2022 Statement) purporting to “restore” the agency’s policy of “rigorously enforcing” Section 5 of the FTC Act that Chair Khan contends was codified out of existence by the 2015 Statement. In last year’s move to rescind, Chair Khan argued that the 2015 Statement was a continuation of the FTC’s “longstanding failure to investigate and pursue” claims under Section 5. Maintaining the same tone in announcing the new policy, Chair Khan emphasized her belief that in recent decades the FTC has allowed Section 5 authority to lay dormant and that her intent as Chair is to reinvigorate aggressive enforcement of this law.
Therefore, the new policy statement comes as no surprise, and is entirely consistent with Chair Khan’s previously stated goals, and a number of other actions she has taken (or signaled that she intends to take) to bring a more aggressive enforcement approach to the FTC.
Section 5 and the 2015 Statement
Section 5 of the FTC Act provides that “unfair methods of competition” are unlawful and “empower[s] and direct[s]” the FTC to prevent businesses and people from using such methods. Congress arguably intended for Section 5 to reach conduct that was not already made unlawful under then-existing antitrust laws (the Sherman Act and the Clayton Act). However, because the FTC Act provides no definition of “unfair methods of competition,” the proper scope of Section 5 has been the subject of intense debate for decades. Over the last 40 years, Section 5 enforcement actions began to rely on principles developed under the other antitrust laws, including the Sherman Act and the Clayton Act, to help determine whether conduct amounted to an unfair method of competition. This included a reliance on a “rule of reason” approach to balancing harms and benefits of analyzed conduct and measuring those benefits and harms according to the consumer welfare standard (e.g., whether something would harm consumers by lowering output or increasing prices). This resulted in comparatively few cases being brought where Section 5 claims stood apart from claims under the other antitrust laws. However, uncertainty continued about whether and how Section 5 could be employed.
In 2015, in a bipartisan effort to clarify the scope of Section 5, the FTC issued the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. The 2015 Statement provided a framework for the FTC’s exercise of its Section 5 power in “standalone” enforcement actions where acts or practices are deemed anticompetitive but outside the scope of the Sherman or Clayton Act. In the 2015 Statement, the FTC clarified: “the Commission is less likely to challenge an act or practice as an unfair method of competition on a standalone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.” It also confirmed that an “unfair method of competition” would be evaluated under a framework similar to the rule of reason, balancing harm and
benefits to the competitive process. Thus, Section 5 enforcement would continue to remain consistent with the spirit of other federal antitrust laws. The Commissioners at that time characterized the 2015 Statement as merely providing written form to what had been de facto policy for quite some time.
The Current FTC’s View of Section 5
When the Democratic majority on the Commission voted last year to withdraw the 2015 Statement, they asserted that the FTC can pursue enforcement actions against “unfair methods of competition” under Section 5 of the FTC Act even if such conduct might not run afoul of the animating principles of the other antitrust laws. The majority’s critique is that the 2015 Statement and much of recent precedent had treated Section 5 as essentially coterminous with the Sherman Act, gutting one of the FTC’s key enforcement mechanisms. Both Republican Commissioners dissented, highlighting that the 2015 Statement represented a successful bipartisan effort and that withdrawing the 2015 Statement removed guidance and added considerable uncertainty.
Now, Chair Khan has provided further color on the current FTC’s view of Section 5 enforcement. In the 2022 Statement, the FTC majority relies heavily on legislative intent behind the FTC Act, and the fact that for most of its history the FTC and the courts regarded Section 5’s scope as distinct from that of the Sherman Act and Clayton Act. In the FTC press release accompanying the policy statement, Khan is quoted as saying, “When Congress created the FTC, it clearly commanded us to crack down on unfair methods of competition,” and that the Commissioners do not have “the right to ignore a central part of our mandate.”
The 2022 Statement dissects the meaning of “unfair” methods of competition, highlighting two key criteria to consider when evaluating whether conduct goes beyond competition on the merits: (i) “the conduct may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature;” and (ii) “the conduct must tend to negatively affect competitive conditions.” These two key principles are “weighed according to a sliding scale” (e.g., “Where the indicia of unfairness are clear, less may be necessary to show a tendency to negatively affect competitive conditions.”). The 2022 Statement also casts a skeptical eye at the prospect of respondents proving that conduct the Commission has determined to be unfair is nonetheless justifiable (e.g., through countervailing benefits), citing a lack of relevant judicial precedent as supporting a move away from any rule of reason type of balancing test employed under other antitrust laws. In their statement explaining the policy shift, the Democratic Commissioners reiterated their view that “[t]he Supreme Court has repeatedly made clear that Section 5 does not apply only to practices that violate the Sherman Act or other antitrust laws.”
Republican Commissioner Christine Wilson authored a scathing dissent. In it she reiterated her objection to the initial withdrawal of the 2015 Statement and argued that the new policy rejects substantial judicial precedent relying on clear objective principles in applying Section 5. Instead, according to Wilson and other critics, the 2022 Statement injects considerable uncertainty for business that may be relatively confident that certain behavior does not violate the Sherman Act or the Clayton Act, but that now have no clear idea whether that same conduct will be found to be unlawful by the FTC. Wilson offered a harsh characterization of the new policy statement as “[resembling] the work of an academic or a think tank fellow who dreams of banning unpopular conduct and remaking the economy.”
Chair Khan’s Agenda
The change in Section 5 policy is the latest step in a series of aggressive changes undertaken by Lina Khan and Jonathan Kanter, her counterpart at the Department of Justice’s Antitrust Division. Both top enforcers seek to revive enforcement approaches that fell out of favor in the late 1970s and into the 1980s. They seek to address areas of perceived shortcomings in the dominant approach to antitrust enforcement, and how it has allegedly failed to deal with many challenges unique to the modern economy. Both AAG Kanter and Chair Khan have promised to continue in this regard.
Chair Khan has signaled strongly that some of her goals rely heavily on a reinvigorated Section 5. This includes, for example, various types of rulemaking to clearer expressions of what will or will not constitute an “unfair” method of competition, and more aggressive investigation of suspect behaviors that have previously not attracted scrutiny.
Based on Chair Khan’s actions and public statements, the FTC’s future may include:
- Investigating private equity and venture capital firms for interlocking directorates that may fall outside the ambit of Section 8 of the Clayton Act;
- Rulemaking that greatly restricts the use of non-competition provisions in employment agreements, particularly in the healthcare and technology sectors;
- Making more frequent use of compulsory process and opening in-depth investigations involving a broad range of conduct; and
- Publishing stringent merger guidelines for horizontal and non-horizontal transactions, with particular focus on consumer-facing industries.
Section 5’s prohibition of “unfair” methods of competition has always likely reached conduct that would not be implicated by other antitrust laws. However, the FTC’s new policy statement that expressly rejects the standards that undergird the rest of the antitrust laws means businesses have little idea what the outer bounds of “fair” methods of competition include. As with other actions taken by the FTC over the last two years, the uncertainty around risks can have a deterrent effect that may ultimately prove counterproductive. With this action, the principal source of uncertainty arises from the FTC’s stated unwillingness to balance any alleged harm against justifications or potential benefits or efficiencies to the competitive process. This runs counter to 40 years of judicial and enforcement precedent that the FTC may ultimately have a difficult time surmounting. As a result, unless and until more clarity emerges, either through litigation or through FTC rulemaking, companies should consider engaging with antitrust counsel on best practices for any conduct that involves or could negatively affect competition or industry participants generally. This is particularly true for companies in the technology and life sciences sectors given the FTC’s continued focus in these areas.