Section 5 of the FTC Act gives the Federal Trade Commission the authority to take action against “unfair methods of competition.” The act was enacted over 100 years ago, and its legislative history indicates that it was left to the FTC to provide specific content to this broad and general language. However, there is still little clarity today regarding what conduct qualifies and does not qualify as an “unfair method of competition” that might subject an actor to enforcement proceedings, litigation, and/or monetary penalties. It is generally agreed that “unfair methods of competition” was intended to cover conduct that would violate the Sherman Act or Clayton Act, as well as some additional conduct. In recent years, the scope of the FTC’s “standalone” Section 5 enforcement authority—addressing conduct that would not necessarily violate the Sherman Act or Clayton Act—has been a volatile topic, with many in the antitrust community calling for the agency to provide formal guidance addressing the boundaries of this authority.
In June 2013, FTC commissioner Joshua Wright issued a proposed policy statement that would have defined the agency’s standalone Section 5 authority as covering acts or practices that harm or will likely harm competition and lack cognizable efficiencies. Since that time, no action was taken by the commission regarding the proposed guidance. In February of this year, at the Baker & Hostetler-sponsored Symposium on Section 5, Wright again called for the commission to adopt formal Section 5 guidelines. He proposed three possible definitions—differing only in their treatment of efficiencies—and announced that he would ask his fellow commissioners to vote on which of the three to adopt. (Recordings of the symposium can be found here.)
Importantly, Congress has also taken an interest in the issue. In October 2013, six members of the House Judiciary Committee and two U.S. senators authored a letter to FTC chairwoman Edith Ramirez, urging the FTC to issue guidance regarding its standalone Section 5 authority. The committee members expressed the concern that Section 5 enforcement was not grounded in the rigorous economic analysis that had shaped traditional antitrust law and, therefore, its boundaries might be “defined only by the existing composition of the FTC.” The authors of the letter also took issue with the views of some commissioners, including Ramirez, that meaningful guidance was provided by the various consent orders resulting from settlements of standalone Section 5 cases, noting that such orders were “tailored to case-specific facts” and never subject to judicial review.
Judiciary Committee Presses for Meaningful Guidance
On May 15, at a hearing of the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law regarding oversight of the antitrust enforcement agencies, several committee members made it clear to Ramirez that this issue is still in their minds and that they remain concerned about the FTC’s failure to enact formal guidelines on the scope of its standalone Section 5 enforcement authority.
Section 5 was front and center in the opening remarks made by both committee chairman Robert Goodlatte, R-Virginia, and newly appointed subcommittee chairman Thomas Marino, R-Pennsylvania. The common theme was the lack of certainty in the business community regarding antitrust enforcement, resulting from the absence of guidance. Goodlatte emphasized the need for “predictable enforcement” and “clear boundaries,” and expressed his concern about “an enforcement environment that can deter innovation and creativity.” He noted that more than a year had passed since the October 2013 letter to Ramirez, but that “the FTC has not yet issued guidance and does not appear any closer to doing so.” In a similar vein, Marino stated that the FTC’s enforcement should be “transparent, fair, predictable, and reasonably stable over time,” so that businesses can “innovate and grow with a firm understanding of what conduct runs afoul of the law and without the fear of capricious government intervention.”
During the question-and-answer portion of the hearing, Marino asked Ramirez about her position that the FTC’s consent orders with settling parties supplied all the guidance needed by the business community regarding the scope of Section 5. Specifically, he asked how she could be confident that such documents contained sufficient guidance in light of the fact that these enforcement actions “rarely reach the federal judiciary.” Ramirez responded that, in her view, the consent orders “provide adequate guidance to the business community” about the “touchstone” in standalone Section 5 cases—“that we don’t act unless there is harm to competition or harm to the competitive process.” She also claimed that the “vast majority” of the FTC’s activity was under the Sherman and Clayton acts, and that the agency acts under its standalone Section 5 authority with “considerable restraint” and “only in limited instances.” Finally, she stated that she was aware of no evidence that any business had been chilled from engaging in procompetitive activity because of the lack of formal guidance on Section 5.
Goodlatte opened his questioning of Ramirez by noting his skepticism of her position that merely “pointing to actions taken” by the FTC could constitute sufficient guidance. Goodlatte asked Ramirez to report on the status of Wright’s proposals, including whether she was willing to work with Wright “on reaching a consensus definition.” Ramirez repeated her belief that Section 5 could be defined “using case-by-case development in the same way that the antitrust rules have evolved over time.” With respect to Wright’s proposal, Ramirez said that she could not comment on internal commission deliberations. Goodlatte interrupted her at that point to ask, “Can you at least tell me if you are willing to work with him?” Ramirez did not answer directly, but remarked only that “these are issues that we are discussing” and that she took “very seriously the concerns that you’ve raised.”
Marino also asked Ramirez to comment on the ability of FTC staff members to open an investigation without a commissioner vote. Ramirez assured him that there was “significant management oversight over any investigation.” She stated that a “preliminary investigation” could be initiated without a vote, but that a commission vote would be required if it were determined that a “more in-depth investigation” was appropriate. Congressman Darrell Issa, R-California, later followed up on this point, commenting that, if FTC staff members are making decisions without specific guidance and without a commission vote, that the FTC was “abrogating what should be your authority.” Ramirez assured him that no investigation is commenced without “senior management supervision” and that no remedy would be imposed without a commission vote.
FTC Should Finally Issue Formal Guidance
It is in the FTC’s interests to adopt some sort of formal guidance regarding the scope of its standalone Section 5 authority. Whatever guidance might be gleaned from the accumulated consent orders the FTC is able to procure in its Section 5 enforcement actions is neither a sufficient nor an appropriate means of defining the scope of Section 5. The analogy to the case-by-case approach of the common law is inapt, since the process from which consent orders emerge is very different from that which produces judicial opinions. A company might decide to settle with the FTC to avoid legal costs, or for many other reasons having nothing to do with the merits of the FTC’s allegations. Indeed, the lack of clarity regarding what conduct constitutes a standalone Section 5 violation might itself drive settlement. Parties settling with the FTC also may not have the ability or motivation to influence the language used in the settlement documents. At best, these consent orders are simply data points reflecting the views of a majority of FTC commissioners at a given time regarding the scope of Section 5. In any event, to the extent these settlement documents do reflect common principles, it should be possible to articulate such principles in formal guidance so that the use of Section 5 stops being a “gotcha” game and instead becomes a full and fair disclosure process facilitating informed deterrence, and not seemingly calculated confusion resulting in wasteful investigations with no lessons learned.
Ramirez’s contention that the FTC uses its standalone Section 5 authority only in “limited instances” has been disputed by Wright and others, who claim that the agency’s standalone Section 5 enforcement accounts for more than half of the consumer savings reported as resulting from its nonmerger enforcement activity. (See Wright’s keynote speech here.) A related argument has been made that the absence of formal Section 5 guidelines has little impact on business activity because the FTC typically seeks only prospective or injunctive relief rather than monetary remedies. However, the FTC recently has sought and successfully obtained large disgorgement penalties as a remedy in its enforcement activity. Further, prospective and injunctive remedies with antitrust monitors can be quite disruptive and costly, due to legal expenses and, in some cases, the cost of abandoning or undoing the challenged conduct.
The apparent resistance of a majority of commissioners to adopting guidelines for its Section 5 authority also contributes to a possible portrayal of the FTC as an out-of-control agency unwilling to place any limits on its authority. This gives more credibility to hyperbolic statements like Marino’s regarding businesses’ alleged “fear of capricious government intervention.” It also likely fuels the belief by some, evidenced in questions by Marino and Issa, that FTC staffers are running amok and opening investigations without appropriate oversight or approval from the commissioners, let alone any guidance or training in the parameters of Section 5 since an absence of formal guidelines affects staff as well. Especially in the current political environment, it is probably not in the long-term interests of the FTC to churn these views by continued inaction. Ramirez has stated that the “touchstone” of Section 5 enforcement is harm to competition or the competitive process. Even issuing guidance to that limited extent, with some meat on the bones, would help to refute the notion that the FTC is really trying to address other concerns like public morals, undue protection of small businesses, or perceived social and environmental harms.
Simply stated, the FTC should be concerned about the fact that Congress is increasingly taking a real interest in this issue. Wright has voiced his belief there is a risk—perhaps now more than ever in the FTC’s history—that Congress will intervene if the FTC ignores its message that the agency should itself enact formal Section 5 guidance after a century of inaction. Indeed, Goodlatte alluded to this possibility, noting in his opening remarks his “hope” that the committee “will not need to take action beyond writing letters and holding hearings.” If the history of antitrust legislation teaches us anything, it is that definitions selected by Congress are unlikely to be as clear, flexible, or detailed as any definition the agency would craft for itself. As Wright has pointed out, the simplest and most obvious legislative solution would be to limit Section 5 to violations of the Sherman Act or Clayton Act, already vetted by the courts, eliminating the FTC’s ability to address any conduct outside these parameters. Ironically, this might also be the best course as a practical matter now since, as Judge Douglas Ginsburg of the U.S. Court of Appeals for the D.C. Circuit recently pointed out at the Symposium on Section 5, when judges are asked to interpret Section 5 without agency guiding principles, “you have a court looking down a very deep well and deciding that it might be better not to jump.”
The FTC was tasked by Congress in 1914 with defining its own authority to police “unfair methods of competition” and should finally do so. Better late than never, before other forces come to bear. Stay tuned.
Reprinted with permission from the June 1, 2015 issue of The Legal Intelligencer. Copyright 2015. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
