The FTC Should Quickly Issue New Section 5 Enforcement Guidelines

Unfair methods of competition are prohibited by Section 5 of the Federal Trade Commission (FTC) Act. The FTC has withdrawn the existing guidelines regarding such cases and promised to issue new ones, but has not yet done so. Given recent and past disagreements among the Commissioners, it is likely that internal disagreements could delay the issuance of new guidance. In light of the urgent need for Section 5 Guidelines, we propose language that might provide a basis for consensus.

In the recent Supreme Court decision in West Virginia v. EPA, the Court concluded that the Clean Air Act lacked the specific authorization necessary to allow the EPA to regulate fossil-fuel-fired electric generators given the “vast . . . significance” of its proposed regulatory action, and because such action was not clearly authorized by Congress under the Clean Air Act. This decision, together with the 2021 Alabama Association of Realtors v. Department of Health and Human Services decision has created serious doubt as to the FTC’s authority to engage in rulemaking with respect to unfair methods of competition (UMC), which are prohibited by Section 5 of the FTC Act. In addition, the American Innovation and Choice Online Act (AICOA), which seeks to make unlawful certain conduct by platforms not otherwise covered under the antitrust laws, may not be passed in the near term. As a result, the enforcement of rules against unfair methods of competition will likely be confined to a case-by-case basis under Section 5, the success of which may depend on new guidance that defines its scope.

Considering these developments, the FTC should quickly issue new Section 5 Guidelines that include specific language that will guide its enforcement of various types of conduct pursuant to its stand-alone authority under Section 5. In order to use such authority in a manner that reaches beyond the Sherman Act, the FTC will need to provide a rationale for this broader enforcement scope and will need to fend off legal challenges based on lack of notice. 

We recommend that the FTC promulgate initial Guidelines that do not include more controversial provisions that might define unfair methods of competition on the basis of “market morality” norms for firms with market power. We are concerned that such Guidelines might have the taint of “damaged goods” from the outset, just as were the Section 2 Report and the Vertical Merger Guidelines, both of which were withdrawn when the administration changed. Withdrawal of new Section 5 Guidelines would also suffer the loss of the less controversial provisions we propose that would achieve many of the goals desired by the majority and other reformers. Those provisions can significantly expand enforcement while being far more defensible to a wider audience. They also can achieve some of the goals of AICOA if that bill is not passed. And if these provisions are widely accepted by courts, then further expansion might be considered and warranted further down the road.

The FTC promulgated Section 5 Guidelines in 2015. In one of her first actions as FTC Chair in July 2021, Lina Khan and the other Democratic commissioners withdrew the FTC’s 2015 Section 5 Guidelines. The majority statement took the position that the 2015 Statement “abrogates the Commission’s congressionally mandated duty to use its expertise to identify and combat unfair methods of competition even if they do not violate a separate antitrust statute.” To “restore the agency to this critical mission,” the majority statement promised that “[in] the coming months, the Commission will consider whether to issue new guidance or to propose rules that will further clarify the types of practices that warrant scrutiny under this provision.” A year later, new Guidelines still have not been issued or proposed. Because the path to competition rulemaking has now become more challenging to traverse, the need for specific Guidelines has become even more important.

In 2013, then-Commissioner Joshua Wright observed that Section 5 is distinct from the Sherman Act and Clayton Act. It is also clear that those statutes do not cover all anticompetitive conduct and, in failing to do so, overall deterrence is reduced. Specifically, neither Section 1 nor Section 2 of the Sherman Act reaches unilateral conduct that allows a firm to achieve, maintain, or enhance market power and harm competition. As a result, such conduct can lead to the type of competitive harm the antitrust laws were meant to prevent, but which are not prohibited by the Sherman Act. In short, the Sherman Act leaves what the Supreme Court has labelled a “gap” in the Sherman Act that, if blindly incorporated into the FTC Act, would handicap the FTC’s ability to stop or deter anticompetitive harm. Applying Section 5 on a stand-alone basis to harmful conduct not covered by the Sherman Act can help to fill this gap.

Bringing such cases as stand-alone Section 5 matters makes sense for a rationally designed antitrust enforcement system. The Sherman Act provides for treble damages and a private right of action; as a result, reaching these competitive concerns under it might lead to fear of over-deterrence or follow-on private litigation of questionable merit. By contrast, a stand-alone Section 5 violation provides no treble damages, civil fines available only for subsequent violations, and no private enforcement. Indeed, enforcing Section 5 is solely the responsibility of the FTC. Thus, Section 5 is a useful approach for conduct that harms competition but where it might be feared that treble damages and private enforcement would lead to over-deterrence.

Our Proposal

We understand that the breadth of FTC enforcement is fraught with ideological disagreement. Compromise may therefore be difficult. But compromise would be highly beneficial for the Guidelines to last beyond the next change in administration. In the hope that a middle ground is possible, we propose the following statement as an initial articulation of the general standards the Commission will apply to evaluate whether conduct constitutes an unfair method of competition: 

“The Commission will consider conduct to be a violation of Section 5 if a firm (or group of firms) engages in conduct that has an appreciable risk of achieving, maintaining, or enhancing market power and thereby harming competition. 

Harm to competition can involve the exercise of sell-side market power with an appreciable risk of leading to higher prices, lower output, reduced innovation, or other conduct to the detriment of customers. Harm to competition also can involve the analogous exercise of buy-side market power with an appreciable risk of leading to lower prices, reduced purchases, decreased innovation or other conduct to the detriment of counterparties such as workers or suppliers.

Commission enforcement will take cognizable competitive benefits into account.  In deciding whether to bring a stand-alone Section 5 challenge, once evidence of appreciable risk of harm is shown, the Commission will expect Respondents to show that the claimed benefits are achieved within the market where the competitive harm occurs.  The Commission also will expect Respondents to show that such offsetting benefits are non-pretextual, valid, conduct-specific, and sufficient to prevent competitive harms.” 

We believe that these principles are a good starting point to reach agreement for identifying the types of conduct that are “unfair” or “illegitimate.” This approach also complements the widely-accepted Philadelphia National Bank  prohibition of cross-market balancing and is applied here beyond mergers.

Within this basic enforcement framework, we can imagine negotiation among the Commissioners over the exact language. For example, the language could signal a more permissive approach by limiting enforcement concerns only to a firm (or group of firms) with “pre-existing market power.” The Guidelines also might replace the term “appreciable risk” with “more likely than not.” There might also be disagreement over the interpretation of the term “harm to competition.” We recommend that this term be left bare in the Guidelines and be permitted to evolve in the context of the conduct and Commission actions in specific cases.

Alternatively, the Commission might consider less permissive language. The Guidelines might use the language of Philadelphia National Bank, for example, to suggest that the Respondents should be expected to make a “clear showing” that the conduct is not likely to reduce competition, if there is sufficient evidence of harm to shift the burden. In addition, the Guidelines could strengthen enforcement by suggesting that the Commission would apply enforcement presumptions to certain types of conduct. For example, certain exclusionary conduct carried out by leading firms in markets protected by network effects, scale economies, regulatory, or other barriers to entry and expansion by competitors might be viewed as presumptively likely to harm competition.  

The stand-alone Section 5 provisions outlined here can be applied to a wide variety of conduct that cannot be reached today under the Sherman or Clayton Acts. The provisions also clarify that FTC enforcement will encompass buyer-side conduct that harms competition in labor and other supply-side markets, while preventing Respondents from justifying the harm by pointing to possible benefits to downstream customers. Thus, these provisions represent a highly defensible approach to increasing enforcement in light of today’s competitive concerns.

Potential Additional Provisions

More controversial would be additional Guidelines provisions that apply Section 5 to “abusive” competitive conduct that involves the exercise of market power that does not raise or maintain barriers to entry or competition or facilitate parallel conduct or coordination. These provisions would have Section 5 move closer or even beyond the European Commission’s “abuse of dominance” standard under Article 102, which can be used to attack the exercise of market power by dominant firms, even if that conduct does not raise or maintain barriers to entry or competition. For example, Article 102 can be used to attack “excessive pricing” by a firm with monopoly power achieved “on the merits.” Indeed, in theory, the FTC could extend this approach to non-dominant firms or even to firms that lack substantial market power. Such expanded Guidelines in principle also could include provisions intended to prohibit perceived unfair exercises of market power that harm customers, competitors or workers, the business conduct of private equity firms that lead systematically to a weaker or less resilient competitive process, or conduct that leads to increased income inequality. 

While we understand that there may be great appetite for such an expansion in the scope of antitrust enforcement by some, there is also likely great distaste by others. Even if the more controversial approach is adopted by the FTC, it would entail such a significant expansion that it is not clear it would pass muster with the courts and Congress. As noted above, we also are concerned that such Guidelines might have the taint of “damaged goods” from the outset and would be withdrawn if and when the administration changes. That would be especially unfortunate because it also would lead to the loss of the less controversial provisions that can significantly expand enforcement. In short, we are proposing Guidelines that would significantly increase effective enforcement, yet with lower legal and political risk. 

However, we sadly also understand that our proposed middle-of-the-road approach might not garner any votes at the FTC. We hope not. We hope that the Commissioners will step back and put on hold some ideological goals and give serious consideration to our compromise proposals which can provide a viable path forward.

Disclosure: Steven Salop has consulted both for companies whose mergers have been investigated by the FTC and also for companies that could be affected by the FTC Guidelines. 

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