Alert November 11, 2022

Federal Trade Commission Issues Expansive New Policy Statement Regarding Enforcement Powers under Section 5 of the FTC Act

Executive Summary
  • The FTC is eager to investigate conduct by larger companies, even where such conduct might not meet the traditional requirements of liability under the federal antitrust laws, and will be open to hearing complaints from smaller firms. 
  • The FTC adopts a mandate to level the playing field for smaller businesses in their interactions with more established competitors. 
  • The new policy appears to be driven by an agenda to engage in more enforcement activity, particularly in technology sectors. 
  • The FTC signals that certain mergers and acquisitions might be affected by this new policy — although it is less clear how the application of Section 5 of the FTC Act would deviate from the traditional review of mergers under the Clayton Act.
  • The change in approach to and interpretation of the FTC Act will likely create some confusion, and it remains to be tested in courts. 
Executive Summary
Executive Summary
Executive Summary

Background

On November 10, 2022 (following its January 2021 withdrawal of its 2015 policy statement regarding enforcement under Section 5 of the FTC Act1 ), the Federal Trade Commission (“FTC” or “the Commission”) issued a new statement announcing a wholesale reinterpretation of its authority under Section 5 of the FTC Act (“2022 Policy Statement”).2 If readers are unfamiliar with this provision of antitrust law, that is not surprising — Section 5 has been a rarely used enforcement tool by the FTC to prohibit “unfair methods of competition” that may not fall under the scope of the more well-known antitrust statues (i.e., the Sherman and Clayton Acts). The FTC’s 2022 Policy Statement signals a significant departure from prior FTC practice, and purports to grant the FTC sweeping powers to pursue enforcement actions against a wide-range of business conduct, even where such conduct might not rise to the level of a violation under the Sherman or Clayton Acts. Most notably, the statement abandons the consumer welfare standard, which focuses on efficiency and impact on consumers without regard to impact on competitors, in favor of an approach specifically designed to protect small business from larger rivals. 

A bit of history: The Federal Trade Commission Act was passed by Congress in 1914 and established the agency itself. Section 5 of the Act prohibits “unfair and deceptive trade acts or practices,” which the agency’s Bureau of Consumer Protection is tasked with enforcing and which has been the more frequently utilized provision of Section 5. Section 5 also prohibits “unfair methods of competition,” which is a term otherwise not defined in the Act. Historically the FTC pursued both injunctive and monetary relief, in the form of restitution or disgorgement, under Section 5, but the recent unanimous Supreme Court decision in AMG Capital Management v. FTC declared that the FTC does not have authority to pursue monetary relief and thus is limited to injunctive relief to stop the conduct at issue.

The FTC’s New View of Its Section 5 Authority

Under the FTC’s prior 2015 guidance on Section 5, the agency articulated an approach to Section 5 enforcement, hewing closely to the same standards for evaluating conduct as the courts have applied under the Sherman Act, which, importantly, included a balancing of pro- and anti-competitive effects. The 2022 Policy Statement abandons this approach, announcing a two part test to determine what constitutes an “unfair method of competition,” without requiring proof of harm to consumers, market definition, or market power. 

  • First, the conduct must be actual conduct that directly or indirectly “implicate competition.” 
  • Second, the conduct must be (a) unfair, coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature, and (b) tend to negatively affect competitive conditions. Under the 2022 Policy Statement, all that needs to be established is that the conduct “has a tendency to generate negative consequences” such as higher prices, reduced output, diminished choice, reduced quality/innovation, or reducing the likelihood of potential competition. The statement explicitly states that the FTC “need not require a showing of current anticompetitive harm or anticompetitive intent in every case.”
  • Third, the Policy Statement sets out several limitations on possible defenses, requiring a company to prove that the asserted benefits of the conduct at issue outweigh all harms to “market participants,” and that the conduct is narrowly tailored to limit any adverse impact on “competitive conditions.” 

Notably, the term “market participants” is not defined, as the 2022 Policy Statement explicitly abandons decades of US antitrust enforcement adherence to the consumer welfare standard, which courts apply by assessing the likely effect on consumers. But a close review of the footnotes reveals that the Commission believes that Congress’ intent in Section 5 was not merely to protect consumers, but to “protect the smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals.” Commissioner Bedoya’s concurring opinion makes this explicit, arguing that the purpose of Section 5 was not to promote efficiency but to ensure a “level playing field for small business.”3

The 2022 Policy Statement goes on to provide a “non-exclusive set of examples” of the type of business conduct that may violate Section 5. While this list covers a broad range of business activities, most striking among these activities are references to M&A deal activity that the FTC has now declared could be prohibited under the FTC Act:

  • Mergers or acquisitions, or joint ventures that have the tendency to ripen into violation of the antitrust laws.
  • A series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.
  • Mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition. 

Quite clearly, the 2022 Policy Statement is aimed at shoring up the FTC’s enforcement powers against mergers of the type that it has struggled to prohibit under Section 7 of the Clayton Act and should be viewed as targeting big tech/pharma acquisitions of nascent competitors and serial acquisitions by private equity or other large, acquisitive firms.

Criticisms and The Path Forward

Unsurprisingly, this new announcement of sweeping FTC powers, which the agency has never sought to employ in more than 100 years, was met with a fierce dissent from the lone Republican on the Commission, Christine Wilson, who decried the policy as devoid of guidance to businesses, finding that it “resembles the work of an academic or a think tank fellow who dreams of banning unpopular conduct and remaking the economy,” and giving the FTC “the authority to summarily condemn essentially any business conduct it finds distasteful.”4  

How broadly will the FTC wield this novel and unprecedented enforcement mechanism? It must be assumed that the agency intends to use its newfound authority to target the conduct and dealmaking that it has been vociferous about, yet has not been able to do much about to-date. But how will the courts view the FTC’s new interpretation of its powers, as agency enforcement actions are ultimately appealable to the federal courts of appeal? That remains to be seen, of course, but one can reasonably assume a chilly reception in many of the courts of appeal and, ultimately, the Supreme Court, given its current make-up. 

Please contact a member of Goodwin’s Antitrust & Competition practice if you have any questions.

[1]https://www.ftc.gov/system/files/documents/public_statements/1591706/p210100commnstmtwithdrawalsec5enforcement.pdf
[2] https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf
[3] https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStmtBedoyaStmt.pdf
[4]https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf