Commissioner Wright Responds to Section 5 Symposium

Josh Wright —  2 August 2013

Joshua Wright is a Commissioner at the Federal Trade Commission

I’d like to thank Geoff and Thom for organizing this symposium and creating a forum for an open and frank exchange of ideas about the FTC’s unfair methods of competition authority under Section 5.  In offering my own views in a concrete proposed Policy Statement and speech earlier this summer, I hoped to encourage just such a discussion about how the Commission can define its authority to prosecute unfair methods of competition in a way that both strengthens the agency’s ability to target anticompetitive conduct and provides much needed guidance to the business community.  During the course of this symposium, I have enjoyed reading the many thoughtful posts providing feedback on my specific proposal, as well as offering other views on how guidance and limits can be imposed on the Commission’s unfair methods of competition authority.  Through this marketplace of ideas, I believe the Commission can develop a consensus position and finally accomplish the long overdue task of articulating its views on the application of the agency’s signature competition statute.  As this symposium comes to a close, I’d like to make a couple quick observations and respond to a few specific comments about my proposal.

There Exists a Vast Area of Agreement on Section 5

Although conventional wisdom may suggest it will be impossible to reach any meaningful consensus with respect to Section 5, this symposium demonstrates that there actually already exists a vast area of agreement on the subject.  In fact, it appears safe to draw at least two broad conclusions from the contributions that have been offered as part of this symposium.

First, an overwhelming majority of commentators believe that we need guidance on the scope of the FTC’s unfair methods of competition authority.  This is not surprising.  The absence of meaningful limiting principles distinguishing lawful conduct from unlawful conduct under Section 5 and the breadth of the Commission’s authority to prosecute unfair methods of competition creates significant uncertainty among the business community.  Moreover, without a coherent framework for applying Section 5, the Commission cannot possibly hope to fulfill Congress’s vision that Section 5 would play a key role in helping the FTC leverage its unique research and reporting functions to develop evidence-based competition policy.

Second, there is near unanimity that the FTC should challenge only conduct as an unfair method of competition if it results in “harm to competition” as the phrase is understood under the traditional federal antitrust laws.  Harm to competition is a concept that is readily understandable and has been deeply embedded into antitrust jurisprudence.  Incorporating this concept would require that any conduct challenged under Section 5 must both harm the competitive process and harm consumers.  Under this approach, the FTC should not consider non-economic factors, such as whether the practice harms small business or whether it violates public morals, in deciding whether to prosecute conduct as an unfair method of competition.  This is a simple commitment, but one that is not currently enshrined in the law.  By tethering the definition of unfair methods of competition to modern economics and to the understanding of competitive harm articulated in contemporary antitrust jurisprudence, we would ensure Section 5 enforcement focuses upon conduct that actually is anticompetitive.

While it is not surprising that commentators offering a diverse set of perspectives on the appropriate scope of the FTC’s unfair methods of competition authority would agree on these two points, I think it is important to note that this consensus covers much of the Section 5 debate while leaving some room for debate on the margins as to how the FTC can best use its unfair methods of competition authority to complement its mission of protecting competition.

Some Clarifications Regarding My Proposed Policy Statement

In the spirit of furthering the debate along those margins, I also briefly would like to correct the record, or at least provide some clarification, on a few aspects of my proposed Policy Statement.

First, contrary to David Balto’s suggestion, my proposed Policy Statement acknowledges the fact that Congress envisioned Section 5 to be an incipiency statute.  Indeed, the first element of my proposed definition of unfair methods of competition requires the FTC to show that the act or practice in question “harms or is likely to harm competition significantly.”  In fact, it is by prosecuting practices that have not yet resulted in harm to competition, but are likely to result in anticompetitive effects if allowed to continue, that my definition reaches “invitations to collude.”  Paul Denis raises an interesting question about how the FTC should assess the likelihood of harm to competition, and suggests doing so using an expected value test.  My proposed policy statement does just that by requiring the FTC to assess both the magnitude and probability of the competitive harm when determining whether a practice that has not yet harmed competition, but potentially is likely to, is an unfair method of competition under Section 5.  Where the probability of competitive harm is smaller, the Commission should not find an unfair method of competition without reason to believe the conduct poses a substantial harm.  Moreover, by requiring the FTC to show that the conduct in question results in “harm to competition” as that phrase is understood under the traditional federal antitrust laws, my proposal also incorporates all the temporal elements of harm discussed in the antitrust case law and therefore puts the Commission on the same footing as the courts.

Second, both Dan Crane and Marina Lao have suggested that the efficiencies screen I have proposed results in a null (or very small) set of cases because there is virtually no conduct for which some efficiencies cannot be claimed.  This suggestion stems from an apparent misunderstanding of the efficiencies screen.  What these comments fail to recognize is that the efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines.  As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service.  Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted.  Under this strict standard, the FTC would almost certainly have no trouble demonstrating no cognizable efficiencies exist in Dan’s “blowing up of the competitor’s factory” example because the very act of sabotage amounts to an anticompetitive reduction in output.

Third, Marina Lao further argues that permitting the FTC to challenge conduct as an unfair method of competition only when there are no cognizable efficiencies is too strict a standard and that it would be better to allow the agency to balance the harms against the efficiencies.  The current formulation of the Commission’s unfair methods of competition enforcement has proven unworkable in large part because it lacks clear boundaries and is both malleable and ambiguous.  In my view, in order to make Section 5 a meaningful statute, and one that can contribute productively to the Commission’s competition enforcement mission as envisioned by Congress, the Commission must first confine its unfair methods of competition authority to those areas where it can leverage its unique institutional capabilities to target the conduct most harmful to consumers.  This in no way requires the Commission to let anticompetitive conduct run rampant.  Where the FTC identifies and wants to challenge conduct with both harms and benefits, it is fully capable of doing so successfully in federal court under the traditional antitrust laws.

I cannot think of a contribution the Commission can make to the FTC’s competition mission that is more important than issuing a Policy Statement articulating the appropriate application of Section 5.  I look forward to continuing to exchange ideas with those both inside and outside the agency regarding how the Commission can provide guidance about its unfair methods of competition authority.  Thank you once again to Truth on the Market for organizing and hosting this symposium and to the many participants for their thoughtful contributions.

*The views expressed here are my own and do not reflect those of the Commission or any other Commissioner.