Under the leadership of Chair Lina Khan, the Federal Trade Commission is pursuing aggressive approaches to hold businesses and individuals accountable for alleged antitrust violations.
This approach includes attempting to expand the FTC's authority to challenge anti-competitive conduct under Section 5 of the FTC Act. The limits of this authority have been debated for years.
While the FTC Act's legislative history and a 1972 U.S. Supreme Court case, FTC v. Sperry & Hutchison, indicate that the commission's Section 5 antitrust authority goes beyond the reach of the Sherman and Clayton Acts — the two principal federal antitrust statutes — more recent federal court decisions have interpreted that authority more narrowly as limited to enforcing violations of those statutes.
As a result, Khan's FTC is considering implementing rulemaking to clarify the conduct that the commission will consider an antitrust violation under Section 5.
While rulemaking is a cumbersome and time-consuming process, the results could be significant for businesses and individuals that may be subject to the FTC's Section 5 antitrust authority.
The FTC's Section 5 Authority
Section 5 of the FTC Act gives the commission authority to police both unfair methods of competition, or UMC, and unfair or deceptive acts or practices, or UDAP, in or affecting commerce.
These two types of authority mirror the FTC's two main bureaus, the Bureau of Competition, which polices UMC, and the Bureau of Consumer Protection, which polices UDAP.
Typically, the FTC has brought Section 5 enforcement actions under its UMC authority for conduct that also allegedly violates either the Sherman Act or the Clayton Act — and the commission cites both Section 5 and the relevant Sherman or Clayton Act statutes in its complaints.[1]
But occasionally the FTC has pursued cases alleging anti-competitive conduct exclusively under Section 5, i.e., where it has determined that the conduct constitutes an "unfair method of competition" in violation of Section 5, regardless of whether it violates the Sherman or Clayton Acts. In these cases, the FTC is invoking its stand-alone Section 5 UMC authority.
The legislative history of the FTC Act and Supreme Court case law support the FTC's stand-alone Section 5 UMC authority.[2] In practice, however, lower federal courts have been reluctant to expand the reach of Section 5 beyond the scope of the Sherman and Clayton Acts.[3]
As a result, the FTC has had limited success in bringing stand-alone UMC cases, leading some — including Khan — to believe that the FTC's best hope in achieving positive outcomes for its stand-alone UMC authority is rulemaking as opposed to case-by-case adjudication.
The FTC's Section 5 Rulemaking Authority
There is debate among the antitrust bar as to whether the FTC has the authority to make rules regarding UMC. While Section 18 of the FTC Act contains an explicit grant of rulemaking authority to the commission for UDAP,[4] the statutory authority for the FTC's UMC power is less clear.
Those in favor of FTC rulemaking on UMC point to Section 6(g) of the FTC Act, which authorizes the commission to "make rules and regulations for the purpose of carrying out the provisions of this subchapter," which, they argue, includes the UMC authority in Section 5.
They also argue that such rulemaking is necessary to adequately enforce Section 5. For example, Khan and former Commissioner Rohit Chopra have argued that case-by-case enforcement is insufficient because it fails to clearly establish what constitutes an "unfair method of competition."
As a result, they argue, companies engage in expensive litigation that would be unnecessary if there were a clear standard.[5]
Those opposed to FTC rulemaking on UMC point to the lack of explicit authority for UMC rulemaking, which in their view shows that Congress did not intend for the commission to legislate on competition rules.
They argue that the FTC's enforcement power on UMC issues should be limited to bringing cases. They argue further that the FTC's ability to litigate in its own administrative court gives the commission sufficient latitude to shape UMC enforcement policy on a case-by-case basis.
It has been many years since the FTC has attempted to issue rules under its UMC authority.
The last time was in 1968, when the commission promulgated a rule that required manufacturers of men's apparel to adopt written plans governing any promotional allowances they offered to retailers.
That rule was rescinded in 1994 because it had never been enforced and was in conflict with policy statements the commission issued after its adoption.[6]
The FTC's Shift in Position
In 2015, the FTC issued a statement regarding its stand-alone UMC Section 5 authority. The statement included three main guidelines for the commission's decisions on whether to challenge an act or practice as an unfair method of competition in violation of Section 5 on a stand-alone basis:
- The commission would be guided by the "consumer welfare standard."[7]
- The act or practice would be evaluated under the rule of reason, i.e., the harm or potential harm to competition would be weighed against the pro-competitive effects of the act or practice.
- The commission would be "less likely" to challenge an act or practice on a stand-alone basis if enforcement of the Sherman or Clayton Acts is sufficient to address the competitive harm.
All three of these provisions are now at odds with the current commission's priorities, and on July 9, 2021, the FTC withdrew the statement, stating as follows:
[T]he 2015 Statement contravenes the text, structure, and history of Section 5 and largely writes the FTC's standalone authority out of existence. In our view, the 2015 Statement abrogates the Commission's congressionally mandated duty to use its expertise to identify and combat unfair methods of competition even if they do not violate a separate antitrust statute. Accordingly, because the Commission intends to restore the agency to this critical mission, the agency withdraws the 2015 Statement.[8]
The commission then stated in stark terms that the statement had led to under-enforcement: "In practice, the [2015] Statement has doubled down on the Commission's longstanding failure to investigate and pursue 'unfair methods of competition.'"
The commission concluded that "in the coming months" it would "consider whether to issue new guidance or to propose rules that will further clarify the types of practices that warrant scrutiny under this provision."
The two minority commissioners, Noah Joshua Phillips and Christine S. Wilson, dissented from the 2021 rescission of the 2015 statement and oppose expansion of stand-alone Section 5 UMC enforcement.
In a dissenting statement at the time, Wilson cautioned that there had been recent events:
- In Congress — e.g., legislation introduced to address disparate antitrust enforcement as between the U.S. Department of Justice and the FTC; and
- In the Supreme Court — e.g., the court's unanimous April 2021 decision in AMG Capital Management v. FTC, limiting the FTC's authority to disgorge profits.
And the commission's reaction to these events, respectively, should not be a new concerted effort to expand the FTC's Section 5 authority, Wilson's statement added.[9]
Phillips also expressed concern about expanding the commission's enforcement efforts outside of the Sherman and Clayton Acts, and was particularly concerned that the rescission of the statement created uncertainty, leaving market participants confused about the FTC's view of the law.[10]
Shortly after the statement was rescinded, then-Commissioner Rohit Chopra left the FTC to head the Consumer Financial Protection Bureau, and the FTC was deadlocked along party lines at 2-2.
As a result, many of Khan's priorities, including Section 5 rulemaking, languished for months. In May 2022, President Joe Biden's nominee, Alvaro Bedoya, was confirmed as a commissioner, giving Khan the third Democratic vote she needed to pursue her agenda.
Therefore, many are waiting to see whether the FTC moves in the coming months — as it said it would do more than a year ago — to implement rulemaking on its Section 5 UMC authority.
In a Sept. 16 speech at the annual Fordham Competition Law Institute's Conference on International Law & Policy, Khan said that one of her top priorities is a new antitrust policy statement on Section 5, to replace the rescinded version that "reflects the statutory text, our institutional structure, the history of the statute, and the case law."
She stated further that the commission "is considering this policy statement and I hope that we will be in a position to release it soon."[11]
Conclusion
Khan is pushing the bounds of antitrust law and seeking to expand the commission's ability to police anti-competitive behavior.
Now that she has a clear majority, we can expect the FTC to move in the coming months to attempt to promulgate rules to define what conduct constitutes "unfair methods of competition" under Section 5 of the FTC Act.
But it will take some time for any such rules to take effect. Informal notice-and-comment rulemaking entails publishing a draft rule in the Federal Register, allowing for public comments, addressing those comments, and publishing a final rule that becomes effective after 30 days. This process generally takes about a year.
Whether new UMC rules would survive the inevitable court challenges remains to be seen. The issue of the commission's authority to promulgate such rules is likely to reach the Supreme Court.
In light of the current court's views on the delegation of legislative authority to federal agencies, the FTC runs the risk that UMC rulemaking may ultimately be struck down.
Khan acknowledged this risk in the Fordham speech, stating in response to a question that "the atmospherics and the environment that we're going to face, and the judiciary, is not lost on us."[12]
But if they do survive, new rules defining — and potentially expanding — the FTC's stand-alone UMC Section 5 enforcement power could have a significant impact on businesses and individuals throughout the economy.
Areas where we may see rulemaking include the rebate practices of pharmaceutical benefit manufacturers, noncompete agreements and other labor market practices, predatory pricing and pay-for-delay agreements.
Without being limited to the Sherman and Clayton Acts and the cases interpreting those statutes, the FTC would potentially be able to police business conduct that had previously been beyond the agency's reach. But the scope of this power will undoubtedly be subject to judicial review, so the courts may have the final say.
Christopher H. Casey and Sean P. McConnell are partners, and Sarah O'Laughlin Kulik is an associate, at Duane Morris LLP.
Brian H. Pandya, a partner at Duane Morris and a former deputy associate attorney general at the DOJ, contributed to this article.
Notes
[1] The Sherman Act prohibits joint conduct (under Section 1) and unilateral conduct (under Section 2) in restraint of trade. The Clayton Act contains provisions relating to anticompetitive conduct, such as outlawing anticompetitive mergers.
[2] See FTC. v. Sperry & Hutchinson Co 
., 405 U.S. 233, 92 S. Ct. 898, 31 L. Ed. 2d 170 (1972).
[3] See, e.g., Official Airline Guides, Inc. v. FTC ,630 F.2d 920, 927–28 (2d Cir.1980),cert. denied,450 U.S. 917, 101 S.Ct. 1362, 67 L.Ed.2d 343 (1981).
[4] See 15 U.S.C. § 57a.
[5] Rohit Chopra & Lina M. Khan, The Case for "Unfair Methods of Competition" Rulemaking, 87 U. CHI. L. REV. 357 (2020).
[6] 16 C.F.R. 412.
[7] The "consumer welfare standard" refers to the concept that conduct should only be considered a violation of the antitrust laws if it has an effect on consumers, either by raising prices or reducing output. Those advocating a more aggressive approach to antitrust enforcement—including Chair Khan and Assistant Attorney General for Antitrust Jonathan Kanter—argue that adherence to this standard has led to underenforcement of the antitrust laws.
[8] FTC, Statement on the Withdrawal of the Statement of Enforcement Principles Regarding "Unfair Methods of Competition" Under Section 5 of the FTC Act (July 9, 2021).
[9] See Remarks of Commissioner Christine Wilson, https://www.ftc.gov/system/files/documents/public_statements/1591554/p210100wilsoncommnmeetingdissent.pdf.
[10] See Remarks of Commissioner Noah Joshua Phillips, https://www.ftc.gov/system/files/documents/public_statements/1591578/phillips_remarks_regarding_withdrawal_of_section_5_policy_statement.pdf.
[11] See Remarks of Chair Lina M. Khan as Prepared for Delivery, Fordham Annual Conference on International Antitrust Law & Policy, https://www.ftc.gov/news-events/news/speeches/remarks-chair-lina-m-khan-prepared-delivery-fordham-annual-conference-international-antitrust-law.
[12] See US FTC's Khan looks to release new Section 5 antitrust policy statement "soon", MLex, September 16, 2022, https://content.mlex.com/#/content/1409503?referrer=email_dailycontentset&dailyId=453f17abc35c4bdca49fa48e186af39d.
Reprinted with permission of Law360.
