Terry Calvani is a former FTC Commissioner and Member of the Governing Board of the of the Competition Authority of Ireland. He is currently Of Counsel at Freshfields Bruckhaus Deringer. Angela Diveley is an Associate at Freshfields Bruckhaus Deringer.
We welcome Commissioner Wright’s contribution in making the important point that the Commission’s unfair methods of competition (UMC) jurisdiction under Section 5 of the FTCA should be subject to limiting principles. We make two observations about the policy statement and a more general observation about the FTC in light of its upcoming 100th anniversary. The first is that injury to competition has long played a role in the debate concerning the appropriate scope of Section 5. The second is that it is not yet clear what role efficiencies should play in a Section 5 claim. Finally, we observe that Section 5 is one of a number of aspects of the FTC’s enforcement mandate that is ripe for reconsideration as we approach the centennial anniversary of both the statute and the agency.
Injury to Competition
It is now uncontroversial that the sine qua non of a violation of the antitrust laws is injury to competition. Yet, the Commission has been struggling with what this assertion means for decades. In its 1984 General Motors Corp. decision, the Commission declined to adopt the “spirit theory” and find a Section 5 violation where Complaint Counsel did not claim competition was harmed. The case was brought under Section 2(d) of the Robinson-Patman Act, which prohibits the discriminatory payment of advertising allowances in connection with the resale of goods. GM was accused of making advertising payments to GMC dealers that leased and rented cars they bought from GM while declining to make such payments to other leasing and rental companies. The Robinson-Patman Act claim failed because the conduct at issue involved the leasing of cars rather than the resale, a necessary element of the claim. Complaint Counsel proffered that the Commission should find a Section 5 violation because, although the conduct did not violate the letter of the Robinson-Patman Act, it violated the spirit of the Act. The Commission in General Motors stated that it would “decline to apply [Section 5] in cases . . . where there has been no demonstration of an anticompetitive impact.”
Commissioner Wright’s proposal finds the General Motors decision to be too restrictive. Similar to the lease/rental conduct described above, an invitation to collude falls short of a requisite element—an agreement—of a Section 1 claim. However, many, including Commissioner Wright, would agree that failed invitations to collude should fall squarely within the boundaries of Section 5, even though they do not actually produce anticompetitive effects. The Commission’s invitation to collude cases, as well as Commissioner Wright’s policy statement thus add to General Motors the ability to establish a Section 5 violation where the effect of the conduct is to “create a substantial risk of competitive harm.” We do not disagree, but observe that this “gap filling” is likely quite small since the Department of Justice prosecutes most such cases as wire or mail fraud. The universe of cases not involving these media, and thus otherwise unenforced, is likely very small.
In an attempt to create more certainty for the business community, Commissioner Wright’s policy statement precludes the application of Section 5 where a respondent can proffer any efficiencies. Commissioner Ohlhausen, on the other hand, has indicated her support of a “disproportionate harm test,” which would allow a Section 5 claim in the face of efficiencies but where the harm substantially outweighs any procompetitive benefits. Commissioner Wright’s test, while providing certainty to the business community, risks torpedoing claims where substantial competitive harm is present. Commissioner Ohlhausen’s test would allow for such claims, but risks uncertainty in determining what exactly constitutes disproportionate harm.
Commissioner Wright has explained that the Commission has a poor track record of balancing pro- and anticompetitive effects in a way that provides guidance to the business community. Moreover, he points out, the limited application of Section 5 does not deprive the FTC of its ability to challenge conduct under the traditional antitrust laws. He therefore has set forth a clear limitation on the applicability of Section 5 to utilize it in a way that he believes will allow the FTC to best enhance consumer welfare.
Commissioner Ohlhausen’s addition of the disproportionality test is somewhat more expansive in application than Commissioner Wright’s test. She explains it would avoid the challenges associated with the precise balancing of pro- and anticompetitive effects. She also states that the disproportionality test is consistent with Commission advocacy and Professor Hovenkamp’s preferred definition of exclusion in the context of Section 2.
Both of these positions have their merits, and we believe they have established the boundaries for the continuing discussion of the appropriate application of Section 5 in its “gap filling” role.
As we approach the FTC’s 100th anniversary, it is important to look at the boundaries of the appropriate utilization of Section 5 in the antitrust context. Commissioner Wright’s proposed Section 5 policy statement is a timely contribution to the debate.
In light of the milestone anniversary, it is appropriate also to think about the procedural aspects of the FTC’s enforcement mandate. There has been substantial criticism of the European Commission for its role as judge, jury, and prosecutor; this criticism also applies to the FTC’s Part 3 proceedings, under which the Commission both initiates cases and then acts as the ultimate fact finder. That said, Part 3 has procedural protections that the EC does not, for example, impartial administrative law judges. Nevertheless, we believe it important at this juncture to rethink whether the adjudicative process at the Commission is the best practice.