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.

Supreme Court Rules NC Dentist Board Not Immune From Antitrust Scrutiny

Earlier this morning, in a 6-3 decision, the Supreme Court ruled that state professional boards comprised of active market participants are not immune from antitrust laws even though the boards are formally designated as a state agency, unless the state also provides active supervision of the boards' actions.

The case arose out of an FTC action against the North Carolina State Board of Dental Examiners ("Board") for issuing cease-and-desist letters to non-dentists offering teeth whitening services.  The Board claimed that the non-dentists were engaged in the unlicensed practice of dentistry.  The FTC, however, claimed that the Board was seeking to protect its members (licensed dentists who performed teeth whitening services) from competition from non-dentists charging lower prices.

The issue on appeal to the Supreme Court was whether the Board enjoyed state action immunity under Parker v. Brown, 317 U.S. 341 (1943), given that the Board was created by and designated as a "agency of the State" under North Carolina law.

The Court explained that "while the Sherman Act confers immunity on the State's own anticompetitive policies out of respect for federalism, it does not always confer immunity where, as here, the State delegates control over a market to a nonsovereign actor."  Although the Board was designated as a state agency under North Carolin law, "[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state action immunity...  Immunity for state agencies, therefore, requires more than a mere facade of state involvement..." 

In this case, the Court was concerned that the Board was controlled by active market participants with a financial interest in the regulation at issue.  (Indeed, the Court noted that 8 out of the 10 Board members earned substantial fees from teeth whitening services.)

The Court explained:

Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern...  In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.

Thus, the Court held that state agencies that are controlled by active market participants must meet the two-pronged test set forth in California Retail Liquor Dealers Ass'n v. Midcal Aluminum Inc., 445 U.S. 97 (1980), to be afforded state action immunity.  That test had been created by the Supreme Court to determine whether a private trade association (wine merchants who were delegated price fixing authority under California law) was entitled to state action immunity.  The Midcal test requires that the State (1) articulate a clear policy to allow anticompetitive conduct and (2) provide "active supervision" of the anticompetitive conduct.

Today, the Court held that this "active supervision test is an essential prerequisite of Parker immunity for any nonsovereign entity -- public or private -- controlled by active market participants."  The Court stated:

State agencies controlled by active market participants, who possess singularly strong private interests, pose the very risk of self-dealing Midcal's supervision requirement was created to address...  This conclusion does not question the good faith of state officers but rather is an assessment of the structural risk of market participants' confusing their own interests with the State's policy goals.

In other words, the Court recognized that "specialized boards dominated by active market participants" are "more similar to private trade associations vested by States with regulatory authority," than to the more typical state agencies previously afforded state action immunity.  "When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest."

Since the Board did not contend that its conduct was actively supervised by the State of North Carolina, the Board was therefore not entitled to Parker immunity.

The dissenting opinion (authored by Justice Alito and joined by Justices Scalia and Thomas) argued that the majority's ruling was an "unprecedented step" that would "create practical problems and have far reaching effects on the States' regulation of professions."  The dissent pointed out that state medical and dental boards are typically staffed by practitioners, and that there is nothing new about the suspicion that such boards were acting out of the interests of their members and not the public.  "As a result of today's decision, States may find it necessary to change the composition of medical, dental and other boards, but it is not clear what sort of changes are needed to satisfy the test that the Court now adopts." 

Among the questions raised by the dissent were:

• What does it mean that a state agency is controlled by active market participants?  
• What is a controlling number?  
• Can something less than a majority suffice? 
• Who is an active market participant?  
• What is the scope of the market being analyzed?  
• Must the market be relevant to the particular regulation being challenged?  
• How much participation makes a person active?

The answers to these questions may eventually be worked out by lower courts or the FTC.  It will be interesting to see whether and how States change the makeup of professional boards or adopt new procedures to ensure that the actions of such boards are "actively supervised" by a non-market participant. 

In the meantime, I expect there will be an increase in the number of cases challenging alleged protectionist activity by state professional boards.

The Supreme Court's decision is available here:

North Carolina State Board of Dental Examiners v. Federal Trade Commission

Minimizing Antitrust Risk in Mergers and Acquisitions

Check out this white paper on antitrust risks in merger and acquisitions.  The paper discusses the importance of preliminary and careful consideration of antitrust issues and compliance with agency requirements, regardless of the size of an acquisition.  Premerger notification requirements under the Hart-Scott-Rodino Act ("HSR Act") are important, but they are not the only antitrust consideration in M&A transactions.  The article, authored by Amanda Ames and Jason Hicks, summarizes the federal law applicable to mergers, describes the role and jurisdiction of the FTC and DOJ, explains the HSR premerger notification requirements and thresholds, offers considerations for non-reportable transactions, and discusses some of more interesting recent case studies.

2014 Elections May Lead To Changes In Antitrust Merger Review

With the Republicans gaining control of the Senate in yesterday's elections, there is a greater chance that Congress may enact reforms to the merger approval process.  Currently, there is a bill pending in the House that would unify merger preliminary injunction standards at the Department of Justice and Federal Trade Commission.  The bill, known as the Standard Merger and Acquisitions Review Through Equal Rules Act ("SMARTER"), has passed out of committee in the House.  It is widely believed that the bill is more likely to pass the Senate under Republican control. 

Currently, DOJ and FTC have separate standards for blocking a merger.  The DOJ must show irreparable harm in order to obtain a preliminary injunction, but the FTC only has to show that blocking the deal with be in the public interest.  The bill would require both agencies to meet the traditional irreparable harm standard.  An interesting Law360 article was published about the SMARTER bill and other antitrust and consumer protection reforms that may result from the 2014 elections and Republican control of the Senate.