What the FTC’s Aggressive New Policy Statement on Unfair Methods of Competition Means for Advertisers

On November 10, the Federal Trade Commission (FTC) released an aggressive new Policy Statement outlining the current FTC’s view on what constitutes “unfair methods of competition in or affecting commerce” under Section 5 of the FTC Act. Section 5 of the FTC Act covers conduct that violates other federal antitrust laws but also other methods of unfair competition. How broadly that “penumbra” of Section 5 should be interpreted has been the subject of debate for years. Consistent with her stated intent to increase broadly the reach of the antitrust laws, FTC Chair Lina Khan has used the Policy Statement to advocate for an exceptionally aggressive view of the conduct that the FTC may challenge under its antitrust authority, eschewing economics-based analysis for conduct that the Commission believes is coercive, exploitative, or abusive. The Statement also dismisses past litigation setbacks where the FTC has asserted Section 5 authority but has been rebuffed by the courts, explaining that even when courts find against the agency on factual grounds, they have still generally affirmed the FTC’s broad and robust authority under Section 5.

FTC Commissioner Christine Wilson issued a detailed and scathing critique of the Policy Statement, citing the legal and policy problems she believes the Statement causes.

The FTC explains that under the new policy, offensive conduct can include activities that arguably constitute only an incipient violation of the antitrust laws. This would include conduct by firms that have yet not gained market or monopoly power, or conduct that may someday ripen into antitrust violations. Offensive conduct could also be conduct that violates only the spirit of the antitrust laws, such as “conduct that tends to cause potential harm similar to an antitrust violation, but that may or may not be covered by the literal language of the antitrust laws or that may or may not fall into a ‘gap’ in those laws.”

The statement further explains that the agency’s prosecutions will not be deterred or constrained by traditional antitrust analysis. The statement explains that the FTC will target conduct resulting in direct evidence of harm, or likely harm to competition, regardless of the traditional antitrust market definition. The Statement also indicates that the FTC apparently will give little weight to evidence that the challenged conduct has countervailing pro-competitive benefits.

The new policy statement identifies general principles for determining whether conduct is an unfair method of competition.

• The conduct must be a method of competition undertaken by an actor in the marketplace, instead of a mere condition of the marketplace, such as high concentration.
• The method of competition must be unfair, meaning conduct that goes beyond competition on the merits (i.e., having superior products or services), such as conduct that is coercive, exploitative, collusive, abusive, deceptive, or predatory, or involves the use of economic power. Additionally, the conduct must tend to negatively affect competitive conditions.

The Statement lists more than a dozen specific examples of conduct that may constitute an unfair method of competition:

• Invitations to collude
• Refusals to deal
• Commercial bribery
• Corporate espionage
• False or deceptive advertising or marketing
• Knowingly receiving and inducing disproportionate promotional allowances
• Tying, bundling, exclusive dealing, or loyalty rebates that attempt to use market power in one market to entrench that power or impede competition in the same or a related market
• Utilizing technological incompatibilities to negatively impact competition in adjacent markets
• Patent licensing practices that undermine the standard-setting process or interfere with the USPTO’s full examination of patent applications
• Merger and acquisition deals that have the tendency to ripen into violations of the antitrust laws
• Series of merger and acquisition deals that do not by themselves violate the antitrust laws but “bring about the harms that the antitrust laws were designed to prevent”
• Merger and acquisition deals involving a potential or nascent competitor that may tend to lessen current or future competition
• Interlocking directorates
• Any other conduct undertaken with other acts and practices that may tend to undermine competitive conditions in the market

Note that one of the listed examples of offensive conduct is “false or deceptive advertising or marketing which tends to create or maintain market power.” As most advertising seeks to increase a firm’s market share or penetration, we see little here that would limit a determined FTC enforcement action targeting a disfavored firm and its marketing activities.

Prior FTC guidance on what constituted an unfair method of competition focused on more concrete examples and on a more limited array of conduct. The FTC’s new approach appears to similar to that of Justice Stewart toward pornography, “I know it when I see it.” That approach, however, gives little guidance to businesses and is consistent with an apparent effort to deter certain business activity by sowing fear and doubt.

For advertisers and marketers, the Policy Statement serves as a powerful message that the current FTC is set on changing the law and little concerned about any negative consequences from overly aggressive enforcement.

Please let us know if you would like additional information about the FTC’s new policy.