Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Commissioner Wright issues proposed policy statement on FTC’s Section 5 authority, (Jun 20, 2013)

By Tobias J. Gillett, J.D., LL.M.

FTC Commissioner Joshua D. Wright issued a proposed policy statement yesterday that would limit the scope of the FTC’s enforcement of Section 5 to acts or practices that harm or are likely to harm competition significantly and that lack “cognizable efficiencies.” In a speech before the Executive Committee Meeting of the New York State Bar Association’s Antitrust Section the same day in New York City, he elaborated on the reasoning behind his proposed statement.

Policy Statement

The policy statement attempts to “clarif[y] the standards and limits the Commission will adhere to in exercising its authority to prosecute unfair methods of competition under Section 5.” It defines an “unfair method of competition” as “an act or practice that (1) harms or is likely to harm competition significantly and (2) lacks cognizable efficiencies.”

The statement asserts that the FTC’s authority to regulate unfair methods of competition goes beyond the scope of the Sherman Act and the Clayton Act. It observes that the Supreme Court has declared that Section 5 covers “not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons.” Moreover, a principal sponsor of the FTC Act stated that it was intended “to make some things publishable, to prevent some things, that cannot be punished under the [existing] antitrust law.” The FTC’s expertise, investigative abilities, and administrative procedures also warrant delegating authority to the FTC to define unfair methods of competition, the statement notes.

Harm to competition. The first element of Wright’s proposed definition “is that the act or practice in question must result in, or likely result in, significant harm to competition as that term is understood under the traditional federal antitrust laws.” Therefore, the FTC would not “consider non-economic factors, such as whether the practice harms small business or whether it violates public morals, in deciding whether to prosecute conduct as an unfair method of competition.” The Commission also would not “challenge conduct as an unfair method of competition where there is well-forged case law under the traditional federal antitrust laws because the Commission does not have an institutional advantage in discerning competitive effects under such circumstances and prosecuting conduct under disparate standards may blur the line between lawful and unlawful behavior.”

“With regard to its authority to define and prosecute unfair methods of competition, the key inquiry for the Commission is the market impact of the conduct claimed to anticompetitive,” the proposed statement reads. As with the traditional antitrust laws, conduct challenged under Section 5 would have to harm the competitive process, not just individual competitors.

The FTC could also “prosecute as unfair methods of competition those practices that have not yet resulted in harm to competition but are likely to result in anticompetitive effects if allowed to continue.” To determine whether a practice that had not yet harmed competition would be likely to do so in future, the Commission’s assessment would have to “include both the magnitude and probability or competitive harm.” The Commission would not find an unfair method of competition where the probability of competitive harm was smaller, in the absence of reason to believe the practice posed a risk of substantial harm. Two categories of unfair methods of competition that the Commission could pursue even when they had not yet caused harm to competition would be invitations to collude and “the use by a firm of unfair methods of competition to acquire market power that does not yet rise to the level of monopoly power necessary for a violation of the Sherman Act.”

Cognizable efficiencies. The second element of Wright’s proposed definition “is that the act or practice in question must not generate cognizable efficiencies.” The statement notes that this “efficiencies screen” would establish a clear and predictable standard for businesses; would permit the Commission to focus its efforts on prosecuting conduct that was most likely to harm consumers; and would avoid deterring conduct that enhances consumer welfare.

When evaluating purported cognizable efficiencies, the Commission would “credit only those efficiencies that are accomplished with the conduct and unlikely to be accomplished in the absence of either the conduct in question or another means having comparable anticompetitive effects.” The Commission would only consider alternatives that were “practical in the business situation faced by the firm,” and would not “compare any efficiencies generated by the challenged conduct to theoretical, but less restrictive, alternatives.” Vague, speculative, or unverified efficiency claims would not be considered, but claims “substantiated by past experience” likely would be.

“The Policy Statement articulates a definition of unfair methods of competition tethered to the modern economic concept of harm to competition that is well established by the antitrust laws and avoids deterring consumer welfare-enhancing competition while targeting conduct most harmful to consumers,” the proposed policy statement concludes. “In doing so, this Policy Statement strengthens the Commission’s ability to target anticompetitive conduct and provides clear guidance on the contours of its Section 5 authority.”

Speech.Commissioner Wright’s speech before the Executive Committee Meeting of the New York State Bar Association’s Antitrust Section elaborated on the rationales behind his proposed policy statement. He noted that commentators have advanced a wide range of theories on the scope of the Commission’s authority to prosecute conduct under Section 5, from restricting it to the limits of the Sherman and Clayton Acts, to using Section 5 to escape “some of the strict requirements established in Sherman Act jurisprudence.” Wright expressed his view that “the Commission’s record with respect to Section 5 is uninspiring if not bleak,” and noted that he had previously called for a policy statement articulating what constituted an unfair method competition under Section5.

A policy statement was necessary to clear up ambiguity regarding FTC enforcement to prevent “uncertainty in the business community about the legality of various types of business conduct,” and to “leverage[e the FTC’s] unique research and reporting functions to develop evidence-based competition policy,” Wright explained.

The current scope of the FTC’s Section 5 authority leads to uncertainty in the business community because it “is as broad or as narrow as a majority of the commissioners believes that it is,” according to Wright. This variation does not permit companies to engage in long-term planning concerning strategies that might involve conduct that a future Commission would consider improper. According to Wright, the FTC’s administrative procedures permit the Commission to “take advantage of the uncertainty surrounding Section 5 by challenging conduct as an unfair method of competition and eliciting a settlement even though the conduct in question very likely would not violate the traditional federal antitrust laws.”

The courts have also not provided sufficient guidance on Section 5’s scope, in Wright’s view. “No court has set out the elements necessary to challenge conduct that falls outside the traditional federal antitrust laws,” and the Supreme Court has not considered the scope of Section five in four decades, despite significant changes in antitrust jurisprudence. Moreover, claims that the Commission had made “judicious” and “responsible” use of its authority could not “be counted upon to supply businesses with the information they require to ensure that they do not violate the statute.”

Issuing a policy statement would also permit the Commission to leverage its institutional advantages in order to steer competition policy. The FTC could interpret its statute to respond to changes in the market and to go beyond current judicial interpretations, and would be able to engage in policy research and development to generate sound competition rules to guide the business community and the courts.

Wright then proceeded to discuss the rationales behind his definition of unfair methods of competition. He expressed his view that “the Commission has sought to do too much with Section 5,” and that it “must recast its unfair methods of competition authority with an eye toward regulatory humility.” Wright believed that his definition would allow “the Commission to reach beyond the scope of the Sherman Act and the Clayton Act, as Congress intended,” while still tying its enforcement “to the modern concept of harm to competition,” allowing it “to leverage its expertise to target conduct that is most likely to harm consumers,” reducing the risk of deterring welfare-enhancing conduct, and giving the business community guidance regarding what conduct would be considered unlawful under Section 5.

Requiring that unfair methods of competition must harm competition would clear up confusion caused by the use of non-economic factors, according to Wright. Moreover, providing that the FTC would not challenge conduct where there is well-forged case law under the antitrust laws would prevent blurring the line between lawful and unlawful conduct, and would ensure consistency with “deeply embedded” judicial precedent. Requiring the FTC to assess the magnitude and probability of harm to competition that would be caused by conduct that has not yet harmed competition would ensure that “the Commission’s analysis is tethered to sound economic reasoning.”

The requirement that a challenged act or practice would not generate cognizable efficiencies would be important because it would “establish a test with clear and predictable results that prevents arbitrary enforcement of the Commission’s Section 5 authority,” would focus “the agency’s scarce resources on conduct most likely to harm consumers,” and would avoid “deterring consumer-welfare enhancing business practices.” The “efficiencies screen” would also “leverage the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context” and tie “the analysis to the well-developed framework offered in the Horizontal Merger Guidelines.” In addition, the “efficiency screen” would give businesses “certainty that conduct can be challenged as an unfair method of competition only when the conduct lacks cognizable efficiencies,” and would reduce the amount of variation between different Commissions’ application of Section 5.

Wright defended the use of a “bright line efficiencies screen” rather than “a rule of reason-styled balancing,” even though the rule might not permit the Commission to “challenge under Section 5 conduct that has very significant anticompetitive effects but only small efficiencies.” He observed that the Commission could still challenge anticompetitive conduct under the traditional federal antitrust laws. The bright-line rule would remedy the problem posed by the lack of boundaries and ambiguity in the Commission’s present enforcement of Section 5, and would allow the Commission to “harness the significant expertise and scarce resources it devotes to Section 5 unfair methods enforcement away from novel theories applied to conduct with ambiguous welfare consequences and toward the conduct most likely to harm consumers,” according to Wright.

“In closing, let me reiterate that my goal is for this proposed Policy Statement to serve as a starting point for a fruitful discussion about potential standards and limits we can impose upon the Commission’s unfair methods authority,” Wright concluded. “I believe it is our responsibility as stewards of the Commission to articulate a position on the appropriate application of the agency’s signature competition statute.”

News: Antitrust FederalTradeCommissionNews