The Uncertain Reach Of Section 5 Of The Federal Trade Commission Act

Compliance with US antitrust laws requires firms to consider not only conduct that falls within the scope of the Sherman Act and the Clayton Act, but also conduct that may violate the Federal Trade Commission Act (the "Act"), particularly Section 5. This task is complicated by the fact that the outer scope of Section 5 remains largely undefined, leading to uncertainty as to what conduct is permissible and impermissible. In the absence of further legislative or judicial oversight, it is unclear just how far Section 5 reaches.

Established almost a century ago, the Federal Trade Commission ("FTC") shares enforcement responsibilities for US competition laws with the Antitrust Division of the Department of Justice. The FTC derives its enforcement powers from the Federal Trade Commission Act and the Clayton Act,1 and its enforcement mission is to halt conduct deemed harmful to competition, including practices barred by the Sherman Act, such as price fixing, bid rigging, customer allocation and other per se antitrust violations.2 Although not expressly authorized to enforce the Sherman Act, the FTC reaches such conduct through Section 5, which states that "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."3 But a question going back to when the Act first became law still remains unanswered: beyond conduct that is already prohibited by the Sherman Act and the Clayton Act, precisely what falls within Section 5's prohibition on "unfair methods of competition?"

There are some who have argued that Section 5 is "coterminous" with the Sherman Act and the Clayton Act—a "vehicle by which the [FTC] challenges" traditional antitrust violations.4 Yet it seems clear that Congress intended something else. The legislative history shows that Congress purposefully passed a vague statute to avoid the "endless task" of legislatively drawing the line between fair and unfair practices in all cases and intended that the reach of Section 5 be developed over time.5 As the Supreme Court observed, "[i]t would not have been a difficult feat of draftsmanship to have restricted the operation of [Section 5] to those methods of competition in interstate commerce which are forbidden at common law or which are likely to grow into violations of the Sherman Act, if that had been the purpose of the legislation."6

The more widely accepted argument is that Section 5 "was intended from its inception to reach conduct that violates not only the antitrust laws, but also the policies that those laws were intended to promote"7 and that Congress "adopted a phrase which ... does not admit of precise definition, [because] the meaning and application [would] be arrived at by ... the gradual process of judicial inclusion and exclusion."8 However, while the Sherman Act's equally vague ban on any "contract, combination ... or conspiracy, in restraint of trade" now incorporates a vast body of case law interpreting its meaning, Section 5 jurisprudence did not develop the same way.

Sperry & Hutchinson was the Supreme Court's last comprehensive analysis of the FTC's Section 5 powers. That opinion, however, is 40 years old and has been described as controversial.9 In Sperry, the FTC entered a cease-and-desist order against Sperry & Hutchinson Co. (S&H) for attempting to "suppress the operation of trading stamp exchanges and other 'free and open' redemption of stamps."10 The Fifth Circuit vacated the order, finding that S&H's conduct had not "violated either the letter or the spirit of the antitrust laws," and thus the order exceeded the scope of Section 5.11 Without reaching the question of whether S&H's conduct did, in fact, violate the letter or spirit of existing antitrust laws, the Supreme Court found that Section 5 empowers the FTC to define and proscribe unfair competitive practices, even if not an infringement of other antitrust laws.12 The Supreme Court...