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Monday, August 17, 2015, 9:03 AM

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

Authored by: Amanda Norris Ames
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.

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Monday, August 10, 2015, 3:57 PM

Motorola and the Extraterritorial Application of US Antitrust Laws to Foreign Component Price Fixing Cartels

Authored by: Jason Hicks
Last month the Supreme Court declined to accept an appeal for two related antitrust cases involving an international price-fixing cartel.  The cases come from different circuits, one was criminal and the other civil, but they involve the same scheme by a group of Asian manufacturers to rig the prices of liquid-crystal display screens used in computers and cellphones.

The criminal case resulted in convictions, prison time, guilty pleas, settlements and large fines.  The follow-on civil case, brought by Motorola, was dismissed because the court found that US antitrust law did not allow a suit to recover damages from the high prices charged to Motorola's foreign subsidiaries, despite the fact that a large percentage of the phones assembled overseas were subsequently sold in the United States.

Under the Foreign Trade Antitrust Improvements Act of 1982, US antitrust law applies to anticompetitive activities outside the US when (1) the foreign conduct has a direct, substantial and reasonably foreseeable effect on US domestic commerce or import trade and (2) the effect gives rise to a claim under the Sherman Act.

The Seventh Circuit's decision, authored by Judge Richard Posner, held that Motorola Mobility, LLC, a US-based technology company, could not recover damages incurred on behalf of its foreign subsidiaries given that they were independent legal entities for tax purposes and the foreign subsidiaries were the direct purchasers of the LCD screens under Illinois Brick.  See Motorola Mobility, LLC v. AU Optonics, No. 14-8003 (7th Cir. Nov. 26, 2014).

In addition to lack of standing under the indirect purchaser doctrine, Judge Posner's opinion discussed the jurisdictional reach of US antitrust law:
The Supreme Court has warned that rampant extraterritorial application of US law "creates a serious risk of interference with a foreign nation's ability independently to regulate its own commercial affairs." [quoting from the Empagran case] ...
Motorola’s foreign subsidiaries were injured in foreign commerce—in dealings with other foreign companies—and to give Motorola rights to take the place of its foreign companies and sue on their behalf under U.S. antitrust law would be an unjustified interference with the right of foreign nations to regulate their own economies. The foreign subsidiaries can sue under foreign law—are we to presume the inadequacy of the antitrust laws of our foreign allies? Would such a presumption be consistent with international comity, or more concretely with good relations with allied nations in a world in turmoil? To quote from the Empagran opinion again, “Why should American law supplant, for example, Canada’s or Great Britain’s or Japan’s own determination about how best to protect Canadian or British or Japanese customers from anticompetitive conduct engaged in significant part by Canadian or British or Japanese or other foreign companies?”
After finding that Motorola's private lawsuit for damages had no merit, Judge Posner noted that the Justice Department filed an amicus brief arguing that the Justice Department would have jurisdiction to investigate and criminally prosecute under US antitrust laws conduct that has a direct, substantial and reasonably foreseeable effect on domestic US commerce.  A price-fixing scheme involving component parts that were assembled overseas with the resultant product sold into the United States may satisfy this jurisdictional test, even if Motorola itself did not have standing to pursue its damges claim.  While the Justice Department may be able to prosecute foreign price-fixing cartels, and indeed did so in the related criminal case, that does not mean the same conduct gives rise to antitrust damages remedy for US-based companies, like Motorola, who were only derivatively injured by the price-fixing cartel.

The bottom line seems to be that the Government can bring some antitrust cases when private plaintiffs cannot, and US companies that chose do to business through foreign subsidiaries cannot "pick and chose from the benefits and burdens of United States corporate citizenship."

The Supreme Court denied to accept the appeals from either the criminal case or the civil case, thus leaving these cases (and the lessons from them) intact.  More information can be found in this New York Times article and Wall Street Journal article.

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