FTC misses mark with new ‘unfair methods of competition’ statement

The Federal Trade Commission (FTC), like many other independent administrative agencies, has a lot on its plate. In addition to having co-enforcement authority of the nation’s antitrust laws with the Department of Justice, the FTC is charged with administering its own eponymous statute, the Federal Trade Commission Act. Among other requirements, Section 5 of the FTC Act declares that any “unfair methods of competition in or effecting commerce” to be unlawful. Significantly, Congress deliberately chose not to define the specific acts and practices that constitute “unfair methods of competition” (UMC), opting instead to delegate this task to the FTC to apply the statute on a flexible case-by-case basis as facts evolve.

{mosads}As to be expected whenever Congress decides to employ a term as subjective as “fair,” the UMC standard has seen its share of criticism over the years. As former FTC Chairman Timothy Muris noted more than a decade ago, the UMC standard in the wrong hands produced “a series of proposed rules relying upon vague theories of unfairness that often had no empirical basis, could be based entirely upon the Commissioners’ personal values, and did not have to consider the ultimate costs to consumers of foregoing their ability to choose freely in the marketplace.” Others simply colloquially joke that “fair is just another four letter word that begins with the letter ‘F.'”

Surprisingly, over the last several years, the FTC has provided little guidance on how it views the UMC standard. Such lack of guidance stands in stark contrast to the FTC’s approach to Section 5’s other primary enforcement mechanism — the prohibition against “unfair or deceptive acts or practices” — where the commission has issued detailed guidance. To remedy this shortcoming, at the urging of just-departed FTC Commissioner Joshua Wright, this August the FTC reversed course and issued a “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” (hereinafter the “UMC statement”). Rather than remedy the guidance deficit by providing detailed analysis, however, the UMC statement is rather perfunctory. Indeed, the UMC statement contains exactly three bullet points which announce that going forward, the FTC will adhere to the following broad principles (quoted verbatim below):

• The Commission will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare;

• The act or practice will be evaluated under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and

• The Commission is less likely to challenge an act or practice as an unfair method of competition on a standalone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.

Despite its paucity, the UMC statement was generally praised by both lawmakers and academics. However, there was one important voice of caution. In the lone dissent, FTC Commissioner Maureen Ohlhausen issued a stern warning about the UMC statement that warrants serious consideration by those interested in good public policy.

First, Ohlhausen highlighted that the content of the UMC statement was “seriously lacking.” In particular, Ohlhausen noted that the statement “does not mention, much less grapple with, existing case law.” Instead, Ohlhausen argues that the “Commission acts as if it is writing on a clean slate for UMC.”

Second, Ohlhausen points out that the UMC statement includes no examples of either lawful or unlawful conduct to provide practical guidance on how the commission will implement this “open-ended” enforcement policy.

Third, Ohlhausen observed that rather than provide concrete analysis, the UMC statement contains only a series of ill-defined platitudes (for example, “guided by the public policy underlying the antitrust laws”; a “framework similar to the rule of reason”; or “taking into account any associated cognizable efficiencies”) that, taken in the wrong hands, allows for a vast “expanded use of Section 5.” More troubling, the new UMC statement permits the agency to pursue conduct under Section 5 in the absence of substantial harm to competition, which, as Ohlhausen warns, will do little to constrain the commission going forward.

Finally, Ohlhausen noted that the FTC adopted the UMC statement without any public input and without serious internal debate — a process which, as Ohlhausen diplomatically pointed out, “would have helped ensure that the Commission is offering durable and practical guidance around the fundamental question of whether and when this agency will reach beyond well-settled principles of antitrust law to impose new varieties of UMC liability.” I, however, will state the matter undiplomatically: The FTC’s conduct in this case was certainly not an example of good government.

So where do we go from here? While the FTC deserves kudos for at least attempting to move the ball forward, given the many concerns raised by Ohlhausen, it would appear that we have not moved very far from former FTC Chairman Tim Muris’s concerns about the commission’s use of the UMC standard highlighted above.

Accordingly, my recommendation is that before we go too far down the road and the omelet is too hard to unscramble, prudence would dictate that we go back to the drawing board. Indeed, in light of the admitted vagaries of the statute and the FTC’s increasing oversight over major sectors of the economy (particularly the technology sector), the American public deserve a well-reasoned and cohesive approach to Section 5’s unfair methods of competition standard, not a bullet-point press release filled with cliches.

Otherwise, I find myself agreeing with Commissioner Ohlhausen astute prognostication: without further clarification of the UMC standard, the new status quo “will ultimately lead to more, not less, uncertainty and burdens for the business community.”

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance and social and economic conditions, with a particular emphasis on the law and economics of the digital age.