October 24, 2014

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Resurgent Use of Section 5 by Federal Trade Commission (FTC) Raises New Risks to Unwary Businesses — Commissioner Proposes Changes

The Federal Trade Commission's use of its unique powers under FTC Act Section 5 has been controversial for decades. Section 5's prohibition of "unfair methods of competition" seems to be broader than the prohibitions under other antitrust statutes — but how much broader? The companies who were subjected to its use in the recent U-Haul, Intel, Google and Boschmatters probably did not think it was broad enough to cover their actions. Their mistake might be understandable: The case law interpreting the statute is outdated, and the actions and statements from the commissioners over the years have been conflicting. The FTC has resisted calls for guidance from industry, the antitrust community and even some in Congress. On June 19, the newest commissioner, Joshua Wright, tried to provide some guidance to businesses when he published his own draft of an FTC policy statement on Section 5 and invited debate on the topic from antitrust counselors and his fellow commissioners.

The interpretation of Section 5's prohibition of "unfair methods of competition" has ebbed and flowed over the decades. Decades ago, one commissioner thought it should be used to prevent "social and environmental harms produced as byproducts of the marketplace." More recently, one commissioner suggested its use to challenge "actions that are collusive, coercive ... or otherwise oppressive." Even a 2008 workshop at the FTC failed to produce any useful guidance. Instead, businesses have been forced to rely on interpretations of recent FTC actions in the area. Unfortunately, as described below, the lessons from those matters for other businesses have not always been clear.

The 2010 action against U-Haul offers the clearest lesson. U-Haul executives instructed their employees to try to collude with their counterparts from Budget, U-Haul's main competitor in the one-way truck rental market. U-Haul executives also used their calls with financial analysts to try to persuade Budget to join them in pricing actions. Budget declined all these invitations to collude, so there was no "agreement" as is necessary under Sherman Act Section 1. A unanimous FTC reached a consent agreement with U-Haul under Section 5 requiring it to submit to monitoring to ensure such invitations to collude do not happen again.

Also in 2010, the FTC settled charges against Intel that some of its customer agreement and product development actions violated Section 5. As a result of the consent order, Intel can no longer offer certain benefits to customers who agree to purchase computer chips only from Intel. Also, Intel agreed to modify some intellectual property agreements with other chipmakers and maintain a key interface on one of its chips so competitors can continue to have access to it.

The FTC concluded its long-running Section 5 investigation of Google's activities in January 2013. The FTC considered — and ultimately rejected — the suggestion that Google's algorithm for returning Internet search results was biased in favor of Google's own products in a way that violated Section 5. Some, but not all, of the commissioners did have Section 5 concerns about Google's "scraping" of content and restrictions on advertisers simultaneously advertising on Google and rival search engines. The FTC took no official action on those matters but Google voluntarily made changes to its business practices. Several of the commissioners issued separate statements explaining their rationale for all these actions.

Finally, in April 2013, the FTC concluded its investigation of an acquisition by Robert Bosch GmbH. The FTC had concerns under Clayton Act Section 7 about aspects of Bosch's acquisition of portions of SPX Corp. Those issues were resolved by agreement. During the investigation, however, the FTC developed concerns with SPX's actions regarding its standard essential patents. A majority of the commissioners thought that filing a patent infringement suit after unsuccessful attempts to determine a fair, reasonable and non-discriminatory license rate for such patents violated Section 5. Bosch agreed to drop those suits after its acquisition and license the patents for free.

Instead of forcing businesses to try to divine how these often non-unanimous FTC decisions might apply to their facts, Wright proposes that the FTC issue specific guidance about when it will challenge actions under Section 5. His draft policy statement would have the FTC use Section 5 to challenge acts only if:

  1. The acts offer no "cognizable efficiencies"

  2. There is or likely would be harm to competition

  3. The challenge could not be brought under any other antitrust statute

The "cognizable efficiencies" prong would be a safe harbor for businesses. Those acts that result in such efficiencies — even if they also harm competition — would not be challenged under Section 5. These efficiencies must be cognizable, not just some later creation of lawyers, and the acts in question must be necessary to their accomplishment.

The "harm to competition" prong is meant to tether Section 5 to the modern antitrust emphasis on harm to the competitive process and not individual competitors. This prong also implicitly rules out other goals that have been proposed for Section 5 by prior commissioners, such as the pursuit of "consumer choice" or the prevention of "social and environmental harms." Wright makes clear that the harm to competition need not have already occurred; instead, Section 5 would be used to challenge acts that have "not yet ... grown into Sherman Act dimensions."

While Wright's draft policy statement would narrow the scope of Section 5 when compared to some of the actions described above, the statement would not narrow Section 5 out of existence. It clearly recognizes that Section 5 reaches conduct beyond the scope of the other antitrust statutes and that the FTC is an expert administrative tribunal uniquely situated to investigate novel business methods. While Wright has encouraged the FTC to show "regulatory humility," this draft policy statement is no "regulatory surrender."

Commissioner Wright is only one commissioner, and this policy statement represents his views alone. Other commissioners will need to be convinced of the need for formal guidance in this area. It remains to be seen if increasing calls for guidance from the business community, academics and Congress will turn Wright's effort into the first step toward clear Section 5 guidance. In the meantime, businesses must keep the potentially broad application of Section 5 in mind when planning their competitive actions.

© 2014 Schiff Hardin LLP

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About this Author

Steven J. Cernak, Antitrust, Trade Regulation Attorney, Schiff Hardin, Law Firm
Of Counsel

Steven J. Cernak has a depth of experience in antitrust and trade regulation law.

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Gregory Curtner, Partner, Schiff Hardin Law Firm, trial attorney
Partner

Few practitioners can match Gregory L. Curtner’s experience, credentials, achievements, and national reputation as a trial attorney in the combined areas of sports, antitrust, business/commercial, defamation, intellectual property, and securities law. He leads Schiff Hardin’s Antitrust and Trade Regulation Group, as well as our firm’s Sports practice.

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William Hannay, Partner, Schiff Hardin Law Firm
Partner

William M. Hannay regularly represents corporations and individuals in civil and criminal matters, involving federal and state antitrust law, the Foreign Corrupt Practices Act (FCPA), foreign direct investments (including Exon-Florio), antiboycott laws, and export control regulations.

312-258-5617