Andrea Agathoklis Murino, Wilson Sonsini Goodrich & Rosati*
Still just a few months into his tenure, Federal Trade Commissioner Joshua Wright made good on his early promise to move Section 5 of the Federal Trade Commission Act into the public dialogue. N1 On June 19, 2013, Wright released a “Proposed Policy Statement Regarding Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act,” together with an accompanying explanatory speech. Some two months after announcing his intention (about which I wrote here), the proposal calls for the FTC to “recast its unfair methods of competition authority with an eye toward regulatory humility in order to effectively target plainly anticompetitive conduct” by clarifying the standards and limits the FTC will employ in the context of Section 5. Wright’s call to arms is necessary, he says, because the failure to articulate clear standards by which Section 5 will be prosecuted creates uncertainty for the business community and consumers, and risks the Commission’s credibility as an expert body and future steward of Section 5.
Importantly, Wright’s proposal is not merely an intellectual think piece. Rather, Wright provides for a specific definition of conduct that will violate Section 5, as well as concrete examples. There is no doubt in his mind (or in the mind of this observer), that Section 5 was intended to condemn conduct beyond that which the Sherman or Clayton Acts capture. But he finds that without a precise definition, the Commission’s ability to consistently apply Section 5, and the ability of businesses and consumers to meaningfully predict whether their conduct could be found violative of Section 5, is virtually impossible. Thus, he proposes defining “an unfair method of competition [as] an act or practice that (1) harms or is likely to harm competition significantly and (2) lacks cognizable efficiencies.”
As to the first element of his test, it will look familiar. Wright believes significant harm to competition should be understood in accordance with traditional antitrust law. This definition, he believes, will allow the Commission to reach conduct that is harmful but not necessarily easily captured by existing Sherman or Clayton Act jurisprudence. Importantly, in his construct, where particular conduct presents examples of “well-forged case law,” the Commission would not challenge that conduct under Section 5, instead relying on the Sherman and Clayton Acts. At the same time, this element enables the Commission to challenge conduct that has not yet resulted in harm to competition but that is likely to do so. He offers two broad categories of conduct that could be exemplars of Section 5 violations: first, instances of “invitations to collude” that fail to rise to Sherman Act violations because there is no agreement; and second, acquisitions of market power that do not yet rise to the level of monopoly power but still harm competition.
The second element looks to the effect of the conduct and is what he calls an “efficiency screen.” In the event cognizable efficiencies arise from the conduct, Wright’s proposal would immunize the conduct from enforcement under Section 5. He explains the efficiency screen is necessary to establish predictability, to focus the agency’s use of its scarce resources where they are needed most, and because it parlays the Commission’s well-developed and well-understood use of efficiencies under the Horizontal Merger Guidelines into the Section 5 realm.
Nine examples are presented in Wright’s proposal. They range from condemning invitations to collude, to condemning a firm that refuses to honor the licensing pledges of a forerunner in interest, to condemning a branded pharmaceutical developer who tweaks its drug solely to extend its patent protection and limit the entrance of a competing generic drug. The examples also provide illustrations of conduct that would not be violative of Section 5 including the changing of a software product that improves the original product and user experience but that simultaneously limits interconnectivity of the software with competitors, to a firm that deceptively forces grocery stores to remove competitor products where that firm has a market share of just ten percent and there is no evidence of price increases or output declines.
What happens from here remains an open question. While Wright’s will is staunch, his ability, as a non-Chairman Commission, to mandate formal Commission-wide action is challenging. At present, there are four Commissioners, split equally with two from each political party, though a fifth was recently nominated to fill the vacancy. N2 With a “Democratic” Chairwoman controlling the Commission’s allocation of resources, and who herself expressed a view in April that specific guidance in the context of Section 5 would be best provided through speeches and enforcement actions, N3 it seems unclear what – if any – traction Wright’s Proposal will garner. What is clear is that Wright will continue to use his pulpit to advance the discussion.
I am still reflecting on the precise nature of Commissioner Wright’s proposal. I find the “efficiency immunity” component to be particularly complicated and worthy of further study. But I nevertheless find his effort heartening. The FTC serves at least two important roles in the context of the antitrust laws: as a law enforcer and as a leading incubator of ideas affecting antitrust and competition law enforcement. Inspiring this expert body to engage in meaningful dialogue on a topic as important as Section 5 enforcement remains, I believe, exactly the “(w)right” call.
1. Section 5 of the FTC Act prohibits, inter alia, “unfair methods of competition in or affecting commerce.”
2. President Obama announced his intention to nominate Democrat Terrell McSweeney for the fifth Commissioner slot on June 21st. Senate confirmation is sure to take at least a few months.
3. See, e.g., Melissa Lipman, Section 5 Cases Offer Best Guidance, FTC Chief Says, Law360, available at http://www.law360.com/articles/432595/section-5-cases-offer-best-guidance-ftc-chief-says (Apr. 12, 2013).
*With this column, Ms. Murino joins The Legal Pulse’s growing roster of Featured Expert Contributors. She was an attorney advisor to then-Chairman William Kovacic at the FTC and was also Counsel to the Assistant Attorney General for Antitrust at the U.S. Department of Justice.