Unfair Competition Under Section 5 of the FTC Act

The Federal Trade Commission under Chair Lina Khan has sought to invigorate competition enforcement and rulemaking since President Biden appointed her. The heart of this mandate is Section 5 of the FTC Act. Section 5 prohibits “unfair methods of competition in or affecting commerce.”  In July 2021, the FTC rescinded its 2015 statement regarding Section 5, and in November 2022, it issued a new Policy Statement regarding the scope of unfair methods of competition.

Congress created the Federal Trade Commission in 1914 because of its concern over the Rule of Reason test for violations of the Sherman Act set forth in the 1911 Supreme Court decision, Standard Oil of New Jersey v. United States. Congress thought that the Rule of Reason was too undefined, and that generalist federal district court judges would apply different and potentially inconsistent approaches. In creating the FTC, Congress wanted to establish an administrative body with expertise in competition.

Congress also wanted this body to have authority to deal with conduct that would not necessarily be condemned under the Sherman and Clayton Acts. The Policy Statement released by the FTC in November 2022 makes it clear that Section 5 reaches beyond these statutes. In addition, the phrase “unfair methods of competition” was purposefully chosen to distinguish the test from common law principles of “unfair competition.”

However, as a balance to this expanded reach of Section 5, Congress did not provide a private right of action for such conduct. Furthermore, it limited the preclusive effect of the FTC’s findings of an unfair method of competition in subsequent follow-on private actions.

The Policy Statement sets forth the general principles of unfair methods of competition. Specifically, the conduct must be a method of competition as opposed to a condition of competition such as high market shares or barriers to entry. The method could be indirect, but in addition, it must go beyond competition on the merits.

In determining whether a method of competition is not competition on the merits, the Policy Statement sets two key criteria. First, the conduct may be “coercive, exploitative, collusive, abusive, deceptive, predatory, or “exclusionary.” The use of dominant economic power in certain circumstances could also be beyond competition on the merits. Second, the conduct must tend to affect competitive conditions. The example provided in the Policy Statement is “conduct that tends to foreclose or impair the opportunities of market participants, reduce competition between rivals, limit choice, or otherwise harm consumers.”

The Policy Statement indicates that this second principle is broad enough to consider harm to multiple actors that might be affected by unfair methods of competition beyond the so-called “consumer welfare” standard generally applied to the Sherman and Clayton Acts. Such actors could include workers and other market participants. Indeed, at the annual colloquium of antitrust professors held by Loyola University Chicago School of Law this past April, I asked Chair Khan, who was the keynote speaker, to confirm that the FTC’s interpretation of Section 5 went beyond the consumer welfare standard. She did so emphatically!

Certainly, the FTC’s proposed rule ban on noncompete agreements reflects an emphasis on the impact of the agreements on employees and the labor market. The FTC’s opposition to so-called “no poach” agreements also reflects a focus on the labor market.

The recently issued Policy Statement regarding the scope of unfair methods of competition comports with the aggressive enforcement efforts of the FTC under Chair Khan. It remains to be seen, however, how the FTC puts this Policy Statement into practice, and how the courts will support it, especially if the enforcement reaches beyond traditional Sherman and Clayton Act enforcement, and seeks to protect the impact of the challenged conduct beyond the consumer welfare standard.