New FTC Policy’s Prohibition On “Unfair” Methods Of Competition Is A Major Departure From Existing Statutes
Last week, the FTC unilaterally attempted to expand its authority and conduct it considers illegal by changing its definition of what constitutes “unfair methods of competition” (UMC) under Section 5 of the FTC Act. According to reporting by Law360, the new policy “replaces an Obama-era version that put guardrails on the FTC’s power[.]” What does it mean for the FTC to be operating with the guardrails off?
Here’s what you need to know:
The updated version of the policy would greatly expand what could be considered illegal conduct to include conduct that hasn’t actually caused harm.
The new policy is not concerned about whether or not questioned conduct caused any “actual” harm, according to the FTC. “[T]his inquiry does not turn to whether the conduct directly caused actual harm in the specific instance at issue. Instead, the second part of the principle examines whether the respondent’s conduct has a tendency to generate negative consequences; for instance, raising prices, reducing output, limiting choice, lowering quality, reducing innovation, impairing other market participants, or reducing the likelihood of potential or nascent competition.”
Further, the new policy asserts Section 5 would not require economic analysis to justify enforcement—only that questioned conduct “tends” to negatively affect competition. “Moreover, Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions.”
The agency could use the new policy to go after conduct that “might not be illegal on its face” without showing that the conduct caused any harm, reports the Wall Street Journal. “[T]he FTC should be able to use the 1914 statute to go after companies whose conduct might not rise to a violation of other landmark antitrust laws, which prohibit practices such as monopolization and price fixing. The FTC’s use of the law would make it easier to challenge conduct that, under other federal laws, might not be illegal on its face. Importantly, the FTC’s statement explaining the move says it wouldn’t need to show that unfair conduct harmed other market participants or consumers, but simply that it ‘has a tendency to generate negative consequences.'”
Overall, the new policy would regard many previously permitted types of conduct as illegal, explains Law360’s Bryan Koenig. “The new policy argues that many types of conduct should be considered illegal regardless of mitigating factors, such as if competitive threats posed by the conduct are only in their ‘incipiency.'”
— Further: “The [now defunct] 2015 statement had expressly called for Section 5 enforcement claims to proceed under the ‘rule of reason’ standard, which allows defendants to try to justify their conduct by balancing allegedly anti-competitive actions against results. Now, the targeted conduct will be judged under the per se standard, which means they will be considered automatically illegal.”
Changes to the Section 5 policy statement have drawn sharp criticism from antitrust experts and the business community for abandoning the consumer welfare standard.
The policy statement “abandons the rule of reason” and “repudiates the consumer welfare standard,” explains FTC Commissioner Christine Wilson in her dissent. “First, the Policy Statement abandons the rule of reason, which provides a structured analysis of both the harms and benefits of challenged conduct. The majority prefers a near-per se approach that discounts or ignores both the business rationales underlying challenged conduct and the potential efficiencies that the conduct may generate. Second, the Policy Statement repudiates the consumer welfare standard and ignores the Supreme Court’s admonition that antitrust ”protects competition, not competitors.’ The Commission will now seek to advance the welfare of inefficient competitors, ‘workers,’ and other unnamed but politically favored groups – at the expense of consumers. Third, the Policy Statement rejects a vast body of relevant precedent that requires the agency to demonstrate a likelihood of anticompetitive effects, consider business justifications, and assess the potential for procompetitive effects before condemning conduct.”
The FTC has essentially “declar[ed] it illegal for companies to compete in ways that help consumers,” says Sean Heather, SVP at the U.S. Chamber of Commerce. “The American economy and consumers benefit from healthy competition. In a new policy statement defining unfair methods of competition, however, the FTC is actually set on declaring it illegal for companies to compete in ways that help consumers.”
Under the new policy statement, the FTC has “carte blanche control over the economy,” with the ability to deem any business conduct a violation without showing harm, intent, or market analysis, Heather further points out. “In the FTC’s view, the agency can deem any business conduct as ‘unfair’ without any showing of harm to consumers, anticompetitive intent, market power, or market definition.”
— Heather continues: “This leaves the FTC with carte blanche control over the economy, allowing it on a whim to decide whatever it feels might be unfair.”
— Further: “The FTC seeks to bar a slew of common business practices that have long been viewed on a bipartisan basis as good for competition, good for consumers, good for lowering prices, and good for a healthy dynamic economy. Further, the FTC now wants to suggest it has powers to review mergers in ways Congress and the courts have explicitly rejected under merger law. All of this is made possible, because the FTC no longer believes that the consumer is at the heart of the agency’s mission.”
There is a “strong likelihood” that Section 5 will be struck down as “an unconstitutional delegation of lawmaking powers from the legislative to the executive branch,” warns Professor Jonathan Barnett of the USC Gould School of Law. “[T]here is a strong likelihood that it would then be compelled to strike down Section 5 as an unconstitutional delegation of lawmaking powers from the legislative to the executive branch.”
— Barnett continues: “[A]ny enforcement action taken under the agency’s newly expanded understanding of Section 5 is unlikely to withstand judicial scrutiny, either as a matter of statutory construction or as a matter of constitutional principle.”