This article is a part of the FTC Rulemaking on Unfair Methods of Competition symposium.
Introduction
In November 2021, the Federal Trade Commission (FTC) published a draft strategic plan for fiscal years 2022-2026 that previewed its vision for enforcement without the rule of reason guiding the analysis and without consumer welfare defining the objective. The draft plan dropped a longstanding commitment from the FTC’s previous strategic plans to foster “vigorous competition” and replaced it with a pledge to police “fair competition.”
The commission also broadened its focus beyond consumers. Instead of dedicating competition enforcement to them, the FTC would see to it that competition would serve the general public. Clues as to the nature of the public interest appeared among the plan’s more specific objectives. For example, to advance “all forms of equity, and support underserved and marginalized communities through the FTC’s competition mission.” The draft plan emphasized an objective to protect employees from unfair competition. Gone from the draft entirely was a previous vow to avoid “unduly burdening legitimate business activity.”
Additional details of the agenda emerged in December 2021, when the commission announced a statement of regulatory priorities describing plans to develop unfair-methods-of-competition (UMC) rulemakings. The annual regulatory plan, also released in December 2021, reiterated the list of practices that could be targeted for competition rules, prompting a dissent from Commissioner Christine S. Wilson, who saw in the plan “the foundation for an avalanche of problematic rulemakings.” Referring to the now-defunct Interstate Commerce Commission and Civil Aeronautics Board, she noted “the disastrous regulatory frameworks in the transportation industry teach the attentive student that rules stifle innovation, increase costs, raise prices, limit choice, and decrease output, frequently harming the very parties they are intended to benefit, and the benefits that flowed to consumers when competition replaced regulation in transportation.”
The Courts on Competition Rulemaking Authority
Whether the FTC has the authority to promulgate the rules it now contemplates has been a 50-year-old debate among legal scholars. Section 6(g) of the FTC Act authorizes the commission: “From time to time to classify corporations and to make rules and regulations for the purpose of carrying out the provisions of sections 41 to 46 and 47 to 58 of this title.”[1] Before 1964, this rulemaking power was directed to the FTC’s administrative functions. Since then, rulemaking has typically addressed consumer-protection concerns, the authority for which was codified in Magnuson-Moss Warranty Act in 1975, incorporated in Section 18 of the FTC Act.
Only once has the commission’s power to promulgate a competition rule under Section 6(g) been tested in the courts. That test played out in 1972 and 1973 in a case involving a rule the FTC issued requiring the posting of octane ratings on pumps at gas stations.[2] Failure to post was declared a UMC and an unfair or deceptive practice (UDAP). Petroleum refiners and retailers challenged various aspects of the rules, including the commission’s authority to issue them, and the case came to Judge Aubrey Robinson in the U.S. District Court for Washington, D.C. He held that the FTC lacked such authority.
The opinion began with a review of the legislative history, which was “clear” to the court.[3] Section 6(g) was intended “only as an authorization for internal rules of organization, practice, and procedure [and] to insure that the FTC had the power to require reports from all corporations.”[4] Buttressing the history were subsequent occasions in which Congress had explicitly granted FTC authority for regulations confined to specific practices, which would have been unnecessary if the power already resided in Section 6(g). That section had not changed since 1914, and the FTC for approximately 50 years had not asserted rulemaking authority under it.
The commission urged the court to apply the definitions of regulation in the Administrative Procedure Act (APA) to the FTC Act. The proposition that words written in 1946 had the same meaning as words written in 1914 was “inconceivable” without any indication that they were related. Further undermining the commission’s argument were amendments to other legislation after APA to authorize rulemaking at other agencies. The absence of a similar amendment to the FTC Act implied that the “rulemaking power in Section 6(g) of the FTCA remains unchanged by Congress to date, and conveys only the authority to make such rules and regulations in connection with its housekeeping chore and investigative responsibilities.”[5] Indeed, Congress considered an amendment that would have authorized the commission to “make, alter, or repeal regulations further defining more particularly unfair trade practices or unfair or oppressive competition.”[6] That legislation died.
Also rejected was the argument that the FTC’s authority under Section 5 to “prevent” UMC includes the power to regulate. The proposition ignored “the very next paragraph of the statute that requires the Commission to conduct adjudicative proceedings.”[7] Until recently, the court noted, the commission itself had repeatedly admitted it possessed no power to promulgate substantive rules,[8] and that the Supreme Court had impliedly rejected the existence of such power.[9] In his conclusion, Judge Robinson quoted Justice Louis Brandeis:
What the Government asks is not a construction of the statute, but, in effect, an enlargement of it by the court, so that what was omitted, presumably by inadvertence, may be included within its scope. To supply omissions transcends the judicial function.[10]
The FTC appealed, and the U.S. Court of Appeals for the D.C. Circuit reversed.[11] In an opinion by Judge J. Skelly Wright, the court cautioned:
Our duty here is not simply to make a policy judgment as to what mode of procedure…best accommodates the need for effective enforcement of the Commission’s mandate…. The extent of its powers can be decided only by considering the powers Congress specifically granted it in the light of the statutory language and background.[12]
But the legislative history that was clear to the lower court became opaque on appeal. Judge Wright acknowledged that Rep. J. Harry Covington (D-Md)—the floor manager of the bill that became the FTC Act—assured his colleagues that Congress was not granting the FTC the power for legislative rulemaking. That would have been unconstitutional, in Covington’s view, although a delegation of administrative rulemaking was not.[13] As he assured his colleagues:
The Federal trade commission will have no power to prescribe the methods of competition to be used in future. In issuing its orders it will not be exercising power of a legislative nature….
The function of the Federal trade commission will be to determine whether an existing method of competition is unfair, and, if it finds it to be unfair, to order the discontinuance of its use. In doing this it will exercise power of a judicial nature….[14]
Supporting Covington was a colloquy between two other congressmen, also quoted by the court:
Mr. SHERLEY. If the gentleman will permit, the Federal trade commission differs from the Interstate Commerce Commission in that it has no affirmative power to say what shall be done in the future?
Mr. STEVENS of Minnesota. Certainly.
Mr. SHERLEY. In other words, it exercises in no sense a legislative function such as is exercised by the Interstate Commerce Commission?
Mr. STEVENS of Minnesota. Yes. The gentleman is entirely right. We desired clearly to exclude that authority from the power of the commission. We did not know as we could grant it anyway. But the time has not arrived to consider or discuss such a question.[15]
But this legislative history, which concededly “carefully differentiated” the FTC’s power from the ICC’s power[16] was “utterly unhelpful” to Judge Wright, who somehow could not square synonymous assurances that the FTC would have “no power to prescribe methods of competition” and would exercise “in no sense a legislative function.” The judge found an easier approach:
If one ignores the “legislative” — “administrative” technical distinction which influenced Covington and utilizes a more practical, broader conception of “legislative” type activity prevalent today, they can be read to support substantive rule-making of the kind asserted by the [FTC].
Freed from the background of the 1914 act, the judge adopted a judicial philosophy popular in the early 1970s. Notions of practicality and fairness allowed courts to realize unexpressed purposes, which in the case of FTC rulemaking meant “specifically the advisability of utilizing the Administrative Procedure Act’s rule-making procedures to provide an agency about to embark on legal innovation with all relevant arguments and information.” Similar decisions supporting rulemaking powers “indisputably flesh out the contemporary legal framework in which both the FTC and this court operate and which we must recognize.”[17] For example, if the National Labor Relations Board (NLRB) could regulate, the FTC should be able to do so, as well. It did not bother the judge that the NLRB and other agencies had received explicit rulemaking authority, or that commission officials had often admitted that they lacked that power.
The Supreme Court declined to review the Petroleum Refiners holdings, but its interpretation of the FTC Act last year casts serious doubt on the validity of Judge Wright’s decision today. In AMG Capital Management LLC v. Federal Trade Commission, the FTC used many of the same arguments that had worked in 1972. This time, however, the agency was unable to persuade a single justice that the act conferred an unexpressed power.
The question in AMG concerned whether the agency could bypass administrative adjudication and bring a cause of action directly in federal court for monetary relief. Section 13(b) of the FTC Act authorizes the agency to seek injunctions without administrative proceedings, but a different section of the act creates a cause of action for redress. Section 19(b) prescribes the procedure whereby the commission can seek money. An action to do so may commence only after the agency has concluded an administrative proceeding that finds a violation of Section 5. For decades, the commission shunned the cumbersome two-step procedure and resorted almost exclusively to consolidated Section 13(b) actions to obtain monetary relief. And for decades, courts affirmed these cases, but the Supreme Court had never weighed in.
Writing for a unanimous court, Justice Stephen Breyer found it highly unlikely “that Congress, without mentioning the matter, would have granted the Commission authority so readily to circumvent its traditional §5 administrative proceedings.”[18] Other statutes might merit broader construction, but not when the powers granted were as clearly expressed as in the FTC Act. The court rejected the commission’s arguments that Congress had intended to allow the commission to choose between alternative enforcement avenues. Congress had not acquiesced in the commission’s use of both approaches (even though Section 19 preserved “any authority of the Commission under any other provision of law”). Addressing the arguments that violators would keep billions of dollars in ill-gotten gains if the commission had to adjudicate first and litigate afterward, the court responded that the agency could ask Congress for the more efficient power. It appeared nowhere in the text of the FTC Act, and “Congress…does not…hide elephants in mouseholes.”[19]
Rules of Fair Competition Fail in the Supreme Court
Long before AMG, the Supreme Court had addressed the limits of the FTC’s authority. Judge Robinson in Petroleum Refiners cited five decisions dating from 1920 to 1965 supporting his conclusion that the court had impliedly rejected rulemaking power. One of those decisions came on May 27, 1935, when the Supreme Court used the limitations of FTC authority to deal a fatal blow to the National Industrial Recovery Act (NIRA). The centerpiece of the New Deal, NIRA authorized the federal government to adopt regulations intended to achieve “fair competition.” Those regulations normalized working conditions, wages, products, and prices in many trades. Their purpose was to stem the forces that were depressing wages and prices in the early years of the Great Depression. Vigorous competition was regarded as one of those forces.
Appeals of convictions for violating one of the codes gave the Supreme Court the opportunity to opine on the meaning of “fair competition” and the appropriate process by which competition should be assessed.[20] The court sought to reconcile fair competition and unfair methods of competition, as the terms were respectively defined in NIRA and the FTC Act. A provision in NIRA deemed a violation of “fair competition” to constitute an “unfair method of competition” under the FTC Act, but the dichotomy made no sense to the Court. The difference between the concepts “lies not only in procedure, but in subject matter.”
On substance, the court held:
We cannot regard the “fair competition” of the codes as antithetical to the “unfair methods of competition” of the FTCA. The “fair competition” of the codes has a much broader range, and a “new significance….for the protection of consumers, competitors, employees, and others, and in furtherance of the public interest… [21]
Such power was the province of Congress, not a regulatory agency.
The court then examined the procedures prescribed for rulemaking under NIRA and adjudicating under FTC Act. Fair competition codes were proposed by industry associations, reviewed by agencies, and adopted by executive orders. By contrast, the FTC had to prove violations in adjudicatory proceedings:
What are “unfair methods of competition” are thus to be determined in particular instances, upon evidence, in the light of particular competitive conditions and of what is found to be a specific and substantial public interest.…To make this possible, Congress set up a special procedure. A Commission, a quasi-judicial body, was created. Provision was made [for] formal complaint, for notice and hearing, for appropriate findings of fact supported by adequate evidence, and for judicial review to give assurance that the action of the Commission is taken within its statutory authority.[22]
In 1935, Congress could not constitutionally delegate the power to issue rules advancing undefined interests of consumers, competitors, employees, and the public to an agency of general jurisdiction. The Congress that passed the FTC Act was well aware of that constraint. That was why the bill’s floor manager assured his colleagues the FTC “will have no power to prescribe the methods of competition to be used in future [or] power of a legislative nature…it will exercise power of a judicial nature.”
Conclusion
A regulatory regime intended to replace vigorous competition with fair competition, to benefit interest groups other than customers, to be implemented while giving short shrift to costs and benefits is unprecedented (at least since NIRA). The mission that the FTC has previewed anticipates rules that can be expected to impose undue costs on legitimate businesses in markets far larger than the sectors once regulated by the ICC and CAB. If history is any guide, the commission’s agenda could cost U.S. consumers hundreds of billions of dollars.
But first, the agency will have to persuade the courts that Congress gave it the power to do so, and if precedent is any guide, the commission will fail. After AMG, courts will be reluctant to extract a phrase in Section 6(g) from the framework of the FTC Act. The power to prevent UMC is specified in the Act, and adjudication is the sole procedure described to exercise that power. If the commission argues that “rules and regulations for the purpose of carrying out the provisions of” the act include vast powers outside those provisions, the agency will end up asking the courts to find another elephant hiding in a mousehole.
