What Is ‘Unfair’ Competition?

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FTC adopts principles to guide decisions on unfair methods of competition

Benton’s Headlines mainly track developments at the Federal Communications Commission, but major telecommunications and media policy news also comes from the Federal Trade Commission. That was true when the FTC released the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act on August 13. This is just the kinda summer reading that DC wonks long for.

Now two or more firms or even industries battling to win customers’ business is almost universally seen as a good thing, generally leading to lower prices, new and better products and services, and expanded consumer choice. A competitive market, it is believed, promotes innovation by rewarding producers that invent, develop, and introduce new and innovative products and production processes.

But as is the case with every silver lining, there can be a touch of gray. What if some players cheat? What if their methods are not fair? Well, that’s why we have the FTC. The Federal Trade Commission Act empowers the FTC to:

  • Prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce;
  • Seek monetary redress and other relief for conduct injurious to consumers;
  • Prescribe trade regulation rules defining, with specificity, acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices;
  • Conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and
  • Make reports and legislative recommendations to Congress.

Section 5 of the FTC Act declares “unfair methods of competition in or affecting commerce” to be unlawful. Congress chose not to define the specific acts and practices that constitute unfair methods of competition in violation of Section 5, recognizing that application of the statute would need to evolve with changing markets and business practices. In the August 13 statement, the FTC said that when it is deciding whether to challenge an act or practice as an unfair method of competition, the Commission will adhere to three principles:

  1. The FTC will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare;
  2. 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 FTC 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
  3. 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.
A reaffirmation of principles – with flexibility

In a speech accompanying the release of the Statement, FTC Chairwoman Edith Ramirez said, “Our aim in adopting this policy statement is to reaffirm the principles that guide our enforcement decisions, leaving for future generations the flexibility to do the same.”

Chairwoman Ramirez explained that the FTC generally has and will use its standalone Section 5 authority to deal with antitrust problems for which there would be little or no relief to consumers if the FTC did not intervene. The Department of Justice also investigates anti-competitive behavior. But the FTC's powers are broader and it can bring cases that don't "necessarily rise to the antitrust level, but threaten competition," said Richard Feinstein, who was head of the FTC's Bureau of Competition from 2009 through 2013 and is now a partner at the law firm Boies, Schiller & Flexner.

To address any claims that the Statement may be too general to provide sufficient guidance to the business community, Ramirez noted that the Statement prescribes no detailed code of regulations which would neither be “feasible or desirable in our variegated and intensely dynamic economy.”

The FTC also emphasized that this new guidance does not signal new or increased enforcement priorities.

The FTC did not feel compelled to deliver guidelines before because it does not use its powers in this arena often, said Feinstein. "The Commission hasn't used this authority that frequently over the years and continued to develop it on a case by case basis," he said. When it identifies anti-competitive behavior, the FTC has been more likely to reach a settlement with a company rather than take it to court. The authority was the basis for two notable settlements in which Intel and Google agreed to change certain business practices in the face of FTC objections.

Despite relatively little enforcement activity, the unfairness issue has continued to stir debate in the legal and business communities because the FTC over 100 years has never formally defined what it means to compete unfairly. Critics in Congress and in the business community have said that what counts as unfair can be in the eye of the beholder, creating the risk of government overreach and arbitrary enforcement. Business advocates also say FTC investigations can be costly, with companies feeling pressure to settle any FTC concerns rather than try to litigate.

The FTC has used its Section authority infrequently in recent years. In fact, "the last time the FTC litigated and prevailed on a case with this competition authority was in the late 1960s," according to former FTC Chairman William Kovacic, who was appointed to lead the FTC by President George W. Bush in 2008 and is now a professor at George Washington Law School.

Reaction: Not Perfect, But Good

“It may not be perfect, but it is progress and that is what counts.”

The Statement was a top priority for FTC Commissioner Joshua Wright who said the move “promises greater certainty to businesses as to what conduct runs afoul” of the FTC’s unfairness authority “while retaining the Commission’s ability to use Section 5 to further its mission of protecting competition and consumers.” [FYI: On August 17, Commissioner Wright announced that he will resign from the FTC as of Monday, August 24, 2015.]

FTC Commissioner Maureen Ohlhausen dissented, saying the new policy was “seriously lacking” and could embolden the FTC to be more aggressive, not less. “The approach of my colleagues to this important issue of competition policy is too abbreviated in substance and process for me to support,” she said. She also wanted the FTC to seek public feedback before moving forward.

FTC Commissioner Julie Brill said, “[T]he FTC has ensured that Section 5 will continue to be a flexible, remedial competition enforcement tool that can be appropriately adapted to new market activities, business models and technologies."

“This is a good first step and we are pleased that the FTC has finally heeded the committee’s calls for guidance,” said House Judiciary Committee Chairman Bob Goodlatte (R-VA) and Rep Tom Marino (R-PA), head of a key subcommittee overseeing the FTC. The two lawmakers said they would continue to work to ensure the agency “administers our antitrust laws in a transparent, stable, fair and predictable manner, and that it does not exceed its statutory authority.”

Rep Hank Johnson (D-GA) -- the ranking Democrat on the House Judiciary subcommittee on Regulatory Reform, Commercial and Antitrust Law – said he doesn’t see the move as lessening the FTC’s authority -- something he’d oppose. “The proposed principles will reflect the Commission’s existing interpretation of its antitrust authority under Section 5 of the FTC Act, rather than narrow or hinder its authority to enforce competition under current law,” he said.

Sen. Richard Blumenthal (D-CT), the top Democrat on a committee that oversees the FTC, called the Statement "historic" and said he hoped it would “lead to more frequent and effective enforcement actions to protect both consumers and businesses.”

The U.S. Chamber of Commerce said the statement didn't go far enough. Sean Heather, who oversees antitrust issues for the group, called the guidance “disappointing,” saying that it “fails to establish an objective standard that closes the door to varying interpretations.”

The Electronic Privacy Information Center (EPIC) said the Statement appears "to narrow the ability of the Commission to pursue unfair business practices and [was] announced without any formal opportunity for public comment." EPIC noted that it and other advocacy groups have urged the FTC to use its authority to police unfair competition to address growing concerns about industry consolidation and privacy protection. EPIC has also noted the failure of the FTC to incorporate public comments in its proceedings, as required by law.

Terry Calvani, former acting chairman of the FTC and now of counsel at the law firm Freshfields Bruckhaus Deringer, called the new guidance “a substantial improvement” that clarifies how the agency will exercise its Section 5 authority. “It may not be perfect, but it is progress and that is what counts,” Calvani said.

Jon Leibowitz, a former FTC chairman and a partner at Davis Polk & Wardwell LLP, said that the principles “should stand the test of time,” because they had bipartisan support.

Conclusion: Competition and Broadband

Competition is the most effective tool for driving innovation, investment, and consumer and economic benefits

It was less than a year ago that FCC Chairman Tom Wheeler delivered his The Facts and Future of Broadband Competition in which he said, “The underpinning of broadband policy today is that competition is the most effective tool for driving innovation, investment, and consumer and economic benefits.” Although the speech was scrutinized mainly for what Wheeler said the FCC should do in areas where not enough competition exists, he also addressed protecting competition where it does exist in broadband markets. The FTC’s recent action helps ensure that that competition will be fair.

By Kevin Taglang.