FTC Issues Guidance on Scope of "Unfair Competition" Under Section 5 of FTC Act

In a short statement issued yesterday, the FTC issued guidance regarding how it will interpret Section 5 of the FTC Act. Section 5 is a little-used antitrust statute for which the FTC has issued no guidance in the Act’s 100-year history. It states that “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce” are unlawful. When drafting the statute, however, Congress did not define specific acts or practices which would constitute unfair competition, leaving considerable uncertainty in the interpretation of the law. 

While most of the Commission’s enforcement actions have been brought pursuant to the Sherman or Clayton Acts, Section 5 prohibits acts and practices which fall outside the scope of those statutes. In other words, Section 5 is broader than the Sherman and Clayton Acts, but the boundaries of “unfair competition” under the FTC Act have never been clearly defined.

The FTC’s new one-page policy statement describes three principals to which the Commission will adhere when enforcing Section 5 on a “standalone” basis. First, the guidance calls on the FTC to promote “consumer welfare,” which is the “public policy underlying the antitrust laws.” Second, the statement provides that any act or practice challenged under Section 5 will be evaluated under a framework “similar to the rule of reason,” meaning that the practice must “cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.” Finally, the guidance notes that the FTC will be less likely to challenge an act or practice under Section 5 if such practice can be addressed through enforcement under the Sherman Act or Clayton Act. 

The agency has suggested that these short principals will allow it to keep a flexible approach to enforcement of the statute, but some critics argue that the guidance is vague and does not go far enough to address the ambiguities in the law, leaving businesses unsure of what could trigger an investigation. Prior to the announcement of these guidelines, the FTC has used the vague standards of Section 5 to negotiate settlements in several high profile and controversial cases.

The FTC has emphasized that this new guidance does not signal new or increased enforcement priorities. For example, Commissioner Joshua Wright recently stated that the new guidelines would not lead to an “explosion of litigation.” However, Wright’s fellow Republican-appointed Commissioner, Maureen Ohlhausen, dissented from the FTC’s guidelines because of her fears that the FTC’s “unbounded interpretation” of Section 5 “is almost certain to encourage more frequent exploration of this authority,” thus leading to more investigations and enforcement activity.

Given the lack of appellate case law interpreting the scope of Section 5, the FTC’s new guidance will, at the very least, provide a framework for predicting what behavior may constitute “unfair competition.” Going forward, companies will know that the FTC’s analysis of Section 5 will proceed along economic analysis similar to the rule of reason. As Commissioner Wright explained:

“The promotion of consumer welfare is a cornerstone of the FTC’s antitrust enforcement, and these principles reaffirm the agency’s legal framework in carrying out that important mission,” said FTC Chairwoman Edith Ramirez. “The statement formally aligns Section 5 with the Sherman and Clayton Acts.”

“The rule of reason has ambiguity too. Complaints about ambiguity in the rule of reason are really complaints about the antitrust laws generally. The fundamental point is that we now with this statement have a way to resolve those types of disputes grounded in modern antitrust instead of based upon the whims of whatever three commissioners happen to believe that day.”

In addition to providing clarity under federal law, it will be interesting to see whether the FTC’s guidelines will be used by state courts when interpreting the scope of “unfair competition” under state law. Most states have their own “little FTC Act,” which in some cases can be enforced by private parties in civil lawsuits. Some states have existing case law defining the scope of “unfair competition” under state law, which may be impacted by the FTC’s new guidance.