Section 5 of the FTC Act and Commissioner Joshua Wright: Mission Accomplished?

Section 5 of the FTC ActFTC Commissioner Joshua Wright recently announced his retirement from the FTC Commission to go back to George Mason University School of Law. But he did not go out quietly.

Not only was he incredibly productive during his FTC tenure, but he left right after the Federal Trade Commission issued “Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” As you may recall, this was one of his express goals when he first began his work at the FTC.

What is Section 5 of the FTC Act?

Section 5 of the FTC Act declares that “unfair methods of competition in or affecting commerce” are unlawful.

What does that mean?

For most of the FTC’s existence, those of us advising antitrust clients had to piece together inferences from a mere handful of cases that have addressed the Act, while at the same time trying to parse speeches and FTC activity by whatever set of commissioners were in power.

There were some cases—mostly decided in the 1980s—that seemed to limit the FTC’s power under the Act, but the authority is sparse. And the FTC seems to change its mind depending upon who is in power.

That is a problem when you have a client that wants to know if they can undertake some sort of activity. It is even more difficult when your client is already under investigation by the FTC and you have to try to explain to them that the standard of whether they have violated the FTC Act—regardless of the legality of their actions under the Sherman and Clayton Acts—would be determined by their adversary, the FTC.

We could advise the client that some prior cases suggested limiting principles, but it was, in reality, entirely unclear how a court would ultimately approach an enforcement action. And many courts might prefer to defer to the governing agency in interpreting the law the agency administrates.

This open-ended statute, of course, offered the FTC great leverage in its investigations and actions because its targets couldn’t effectively predict the likely scope of Section 5 of the FTC Act. This leverage can lead to forced settlements for targets that don’t know the standard by which the agency will judge them.

And the FTC had not issued any significant guidance about how it would enforce Section 5 of the FTC Act. It was clear to most people in the antitrust community that the Act was potentially broader than the Sherman and Clayton Acts—the traditional antitrust statutes—but the extent and scope were unclear.

(As an aside, the FTC does its antitrust enforcement through this FTC Act, even if it involves existing antitrust statutes, so the only real issue is how much broader is the FTC Act than the other antitrust statutes. The FTC refers to this as their “standalone” Section 5 authority).

The scope of Section 5 of the FTC Act was an important issue because when it comes to competition enforcement there is a very fine line between anticompetitive activity and strong procompetitive activity. Indeed, it isn’t always clear whether a particular type of business practice is either strongly procompetitive or actually anticompetitive.

So if Section 5 of the FTC Act is too broad it might deter conduct that in fact helps competition a great deal, which would undercut the purpose of the statute itself. This is a recurring problem for antitrust enforcement.

Enter now-Former FTC Commissioner Joshua Wright

I had the great fortune to have worked with Commissioner Joshua Wright before he joined the FTC and I recall from both my conversations with him and his writings that he was concerned about the unpredictable breadth of Section 5 of the FTC Act.

So I was not surprised when one of his first major speeches after becoming FTC Commissioner set forth as a top priority to develop a more transparent and evidence-based approach to FTC Section 5 enforcement. Indeed, I was in the audience for that speech and wrote about it here, in the Daily Journal. You can read Commissioner Wright’s speech here.

Commissioner Wright expressed concern that the FTC had not set Section 5 on an express course toward evidence-based antitrust. Any guidance, he argued, should make it clear that any Section 5 case “must result in harm to the competitive process and, in turn, reduce economic welfare.”

The FTC’s Section 5 Statement

The Section 5 statement itself is short—to the dismay of dissenting Commissioner Maureen K. Ohlhausen, who wanted a longer more detailed statement that could better constrain the agency (but more on her thoughtful statement in the next section).

Here are some of the highlights:

The statement itself declares that it “is intended to provide a framework for the Commission’s exercise of its “standalone” Section 5 authority to address acts or practices that are anticompetitive but may not fall within the scope of the Sherman or Clayton Act.”

So we know that the statement’s purpose is to set out principles (or a framework) for the region between the traditional antitrust laws and the maximum reach of Section 5 of the FTC Act, which (according to the statement) extends beyond these antitrust laws to acts and practices that “contravene the spirit of the antitrust laws and those that, if allowed to mature or complete, could violate the Sherman or Clayton Act.” So, narrowing further, the outer reach of Section 5 includes either incipient violations of the traditional antitrust laws or acts that violate the spirit of these laws.

Finally, the statement sets forth three bullet points that define the principles that the FTC adheres to in deciding whether to challenge an act or practice under Section 5:

First, “the Commission will be guided by public policy underlying the antitrust laws, namely the promotion of consumer welfare.” I won’t get too technical here, but referencing consumer welfare as opposed to general welfare is an important point because the question has been debated in antitrust for years.

Many years ago, the antitrust laws did not have the foundation in economics that they do now. The “public policy underlying the antitrust laws,” is pretty well grounded in economics, so we should expect that the FTC’s enforcement decisions will be as well. Indeed, the FTC has a Bureau of Economics, which plays an essential role in their functioning.

As an aside, the European Union has been a little slower in moving to a competition regime founded on economic principles, but I believe they are on their way; they have certainly made progress over the last couple decades.

This first point is quite important and implicitly includes a lot of substance.

The second point is that the “act or practice will be evaluated under a framework similar to the rule of reason …” [and will take] “into account any associated cognizable efficiencies and business justifications.” The rule of reason, roughly, compares harm to competition or the competitive process with procompetitive benefits (or business justifications).

This is the essence of antitrust analysis. The process can be expensive and time consuming (which is why plaintiffs drool with excitement when their claims are judged under the per se rule instead). The most important point here is that the FTC will, expressly, take efficiencies and business justifications into account. I don’t think this surprises anyone, but it is nice to see in print as a foundational principle.

Finally, the statement’s third point is that the FTC 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.”

What I think this means is that if, for example, the issue is whether to target a defendant for exclusive dealing, the FTC will decide whether to challenge the practice based upon the current antitrust doctrine of the Sherman and Clayton Act because those acts are sufficient to address, in this example, exclusive dealing.

This is important because it should limit the FTC in inventing its own rules and standards for types of conduct in which the courts have already established an antitrust doctrine surrounding that type of conduct. So, going back to exclusive dealing, if the antitrust laws clearly establish that an exclusive agreement with a term of one month in a particular market is unlikely to substantially foreclose competition under the traditional antitrust laws, the FTC cannot come in and determine that under Section 5, that short-term-agreement principle doesn’t exist.

Of course, we don’t know exactly how the FTC will enforce these guidelines, so we will have to wait and see what happens.

Commissioner Maureen Ohlhausen’s Dissenting Statement

FTC Commissioner Maureen Ohlhausen dissented, stating that the “approach of my colleagues to this important issue of competition policy is too abbreviated in substance and process for me to support.” And the guidance itself creates more questions than answers.

Most importantly, she points out that the content in the policy statement is “seriously lacking.” She is absolutely correct. This policy statement doesn’t look like other guidelines issued by the FTC and DOJ, which go into great detail and cite specific examples. Here are the horizontal merger guidelines, for example. And here are the guidelines for collaborations among competitors.

As you can see, the Section 5 guidelines look much different than prior guidelines. They lack detail and, well, specific guidelines.

Commissioner Ohlhausen goes into detail about why substantive guidelines are important and her points are persuasive.

Conclusion: Are the FTC Section 5 Guidelines Mission Accomplished?

In my opinion, the answer is that the Section 5 guidelines are an important mission accomplished. But more work needs to be done. In a way, I think that both the Commissioners that voted for the guidelines and Commissioner Ohlhausen are both right. (Don’t worry, I’m not planning a career in politics).

My take is that the Section 5 guidelines that the FTC issued are necessary foundational principles, upon which future guidance can be built. Putting together a detailed list of specific guidance probably wasn’t possible with the Commission. There was and is too must disagreement.

But—even more importantly—because of the level of controversy and disagreement inevitable with a much more detailed outline, a more detailed  guideline would have been become out of date very quickly, upon the appointment of a new commissioner with slightly different views, or developments in the antitrust laws.

The guidelines would have been newsworthy—perhaps even more newsworthy—but they wouldn’t have been as important as the ones that were issued.

That is because the guidelines that the FTC issued both set forth important principles of substance and are foundational enough that they can likely stand the test of time.

This is an imperfect analogy, but we can compare the guidelines that the FTC issued with a constitution and the more detailed guidelines that the FTC could have issued with statutory laws. The constitution, i.e. the foundational guidelines the FTC issued, need to be more general to survive time and change. They should create principles upon which we can mostly agree, but which can also literally “guide” the FTC in future policy decisions.

But Commissioner Ohlhausen is also correct because the issued guidelines are not sufficient by themselves to bind the FTC and to let the private sector (and antitrust bar) know what is legal and what is not. To fulfill that goal—which is a laudable one—the FTC should, as it does with other types of guidance—issue more detailed guidelines that (1) flow directly from the principles set forth in the Section 5 guidelines; (2) are more detailed, with citations and discussion of examples and case law; and (3) are periodically revised.

These more detailed guidelines are, to follow the original imperfect analogy, sort of like statutory law. They must flow from and be consistent with the constitution, the current Section 5 Policy Statement, but they are more detailed.

So, in my view, Commissioner Joshua Wright did accomplish his mission. And following the constitution analogy, I guess that makes him a Founding Father.

Congratulations on your successful mission, Josh. We hope that you are enjoying life as a civilian, back to teaching economics and law at George Mason School of Law.
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