The FTC Abandons (The Rule Of) Reason

• Published date: 22 November 2022
• Subject Matter: orporate/Commercial Law, Antitrust/Competition Law, M&A/Private Equity, Corporate and Company Law, Antitrust, EU Competition
• Law Firm: Shearman & Sterling LLP
• Author: Mr Ben Gris, Jessica Delbaum, David Higbee, Jonathan Cheng and Jacob Coate

On November 10, 2022, the Federal Trade Commission (FTC) issued a policy statement (the "Policy Statement") radically expanding the FTC's interpretation of prohibited "unfair methods of competition" under Section 5 of the FTC Act. According to the Policy Statement, in determining whether something is unfair, the FTC will consider (1) whether the conduct is "coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature" and (2) whether the conduct impairs competition. Notably, the FTC is abandoning the longstanding "rule of reason" previously employed by the FTC and by courts in antitrust cases. Instead, the Policy Statement states that the FTC may bring Section 5 cases without alleging a relevant product market and may not allow companies to justify allegedly unfair conduct with procompetitive or business justifications. Although this interpretation will no doubt be tested in the courts in the coming years, the Policy Statement creates significant uncertainty for companies now, both in their day-to-day activities and in the M&A context.

Section 5 and the 2015 Statement

Congress enacted the FTC Act in 1914. Section 5 of the FTC Act prohibits "[u]nfair methods of competition in or affecting commerce."¹ In large part, Congress designed Section 5 to supplement the Sherman and Clayton Acts.² Although the FTC often alleges a Section 5 violation with violations of the Sherman and/or Clayton Acts, it has rarely brought standalone actions enforcing Section 5. As a result, there has been little jurisprudence interpreting Section 5, and the Supreme Court has never identified Section 5's outer bounds (or even the standard for identifying a violation).

"The standard of 'unfairness' under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the [FTC] determines are against public policy for other reasons."³ Although the Supreme Court has acknowledged that Section 5 is "a broad delegation of power" leaving the "development of the term 'unfair' to the [FTC],"⁴ the Supreme Court's willingness to defer to the FTC's determination of what is "unfair" has waned.⁵

For decades, in determining whether something was an unfair method of competition, the FTC used a framework similar to that employed in Sherman Act and Clayton Act cases. Specifically, (1) the FTC took the view that Section 5's goal was to maximize consumer welfare, (2) would usually only bring a standalone challenge if the Sherman and Clayton Acts were insufficient, and (3) would evaluate "unfairness" by considering whether the conduct was likely to harm the competitive process, accounting for any offsetting procompetitive effects or business justifications, consistent with the longstanding rule-of-reason framework.⁶ This approach was codified in a 2015 bipartisan policy statement (the "2015 Statement").

Last year, the FTC rescinded the 2015 Statement. And on November 10, the FTC issued the Policy Statement, radically departing from its prior practice, untethering Section 5 from the rule of reason, and raising more questions than it answers. The Policy Statement takes an expansive view of Section 5's scope but provides little concrete guidance as to what is "unfair."⁷

The Policy Statement

The Policy Statement offers the following framework and guidance for determining whether something is an unfair method of competition.⁸

Method of Competition

Section 5 only applies to methods of competition, meaning that it only prohibits conduct, not conditions.⁹ For example, anticompetitive conditions (high barriers to entry, concentrated market share, etc.) that are outside of a firm's control would not fall within the FTC's view of Section 5. Moreover, the conduct "must implicate competition," although it "can be indirect."¹⁰ For example, indirect competitive conduct like the "misuse of regulatory...