[On Monday, June 27, Concurrences hosted a conference on the Rulemaking Authority of the Federal Trade Commission. This conference featured the work of contributors to a new book on the subject edited by Professor Dan Crane. Several of these authors have previously contributed to the Truth on the Market FTC UMC Symposium. We are pleased to be able to share with you excerpts or condensed versions of chapters from this book prepared by authors of of those chapters. Our thanks and compliments to Dan and Concurrences for bringing together an outstanding event and set of contributors and for supporting our sharing them with you here.]
[The post below was authored by Alden F. Abbott.]
In over a century of existence, the U.S. Federal Trade Commission (FTC) has been a policy leader in developing American thinking about and in enforcing antitrust and consumer protection laws pursuant to several specific statutory mandates. It has also promulgated a substantial number of consumer protection rules, dealing with a wide variety of practices. It has almost never, however, enacted substantive rules seeking to regulate specified forms of business conduct that affect competition in the marketplace.
In 2021, however, the prospects for FTC competition rulemaking changed dramatically. A new Biden administration FTC chair, Lina Khan, publicly emphasized that the Commission should undertake “unfair methods of competition” (UMC) rulemakings. In December 2021, the FTC issued a “Statement of Regulatory Priorities” (SRP) stating that “the Commission in the coming year will consider developing both unfair-methods-of competition [UMC] rulemakings as well as rulemakings to define with specificity unfair or deceptive acts or practices [UDAPs].” The SRP also summarized the status of FTC rules and guides that are subject to periodic review.
With regard to UDAP rules, the SRP highlighted for consideration “rules that allow the agency to recover redress for consumers who have been defrauded and seek penalties for firms that engage in data abuses.” The SRP also explained that “the abuses stemming from surveillance-based business models are particularly alarming,” and thus the FTC would consider a possible rulemaking focused on “curbing lax security practices, limiting intrusive surveillance, and ensuring that algorithmic decision-making does not result in unlawful discrimination.”
With respect to UMC rules, the FTC painted with a broad brush, and referenced President Biden’s July 2021 Executive Order on Competition:
Over the coming year, the Commission will also explore whether rules defining certain “unfair methods of competition” prohibited by section 5 of the FTC Act would promote competition and provide greater clarity to the market. A recent Executive Order encouraged the Commission to consider competition rulemakings relating to non-compete clauses, surveillance, the right to repair, pay-for-delay pharmaceutical agreements, unfair competition in online marketplaces, occupational licensing, real-estate listing and brokerage, and industry-specific practices that substantially inhibit competition. The Commission will explore the benefits and costs of these and other competition rulemaking ideas.
Recently, the Commission published in the Federal Register a “Request for Public Comment Regarding Contract Terms that May Harm Fair Competition,” which included for reference two public petitions for competition rulemaking the Commission has received. One of those petitions was to curtail the use of non-compete clauses, and the other was to limit exclusionary contracting by dominant firms, but the Commission also solicited additional examples of unfair terms. Members of the public filed thousands of comments, which the Commission’s staff are carefully reviewing.
In short, significant FTC competition-related rulemaking initiatives are to be expected in 2022. The prospect that those initiatives will yield binding rules that survive legal scrutiny is, however, vanishingly small.
This commentary (which is an abridged chapter in a book on FTC rulemaking published by Concurrences) will explore legal doctrines that seriously constrain the FTC’s ability to enact competition rules. After summarizing the FTC’s authority to engage in rulemaking, it will turn to five major legal impediments to successful competition rulemaking that the FTC must confront. Each of these impediments creates substantial competition rulemaking legal risks for the Commission. Considered collectively, these impediments point to a very low likelihood of competition rulemaking success. Accordingly, the FTC should reconsider its bold competition rulemaking agenda and focus instead on devoting those rulemaking resources to other initiatives within its purview, including competition enforcement actions and policy studies. Such a reset of FTC priorities would likely yield a far better allocation of scarce governmental resources to initiatives that benefit consumers and avoid the imposition of unwarranted costs on private actors and the competitive process.
1. FTC Rulemaking: An Overview
The Federal Trade Commission is an independent federal agency created pursuant to the Federal Trade Commission Act of 1914. The FTC’s mission is to protect consumers and promote competition (see generally here). It does this primarily through enforcement actions, directed at practices that violate section 5 of the FTC’s Act’s prohibitions on “unfair methods of competition” and “unfair or deceptive acts or practices.” While the FTC has also promulgated binding rules and non-binding enforcement guides throughout the course of its history, its principal means for advancing its mission has been enforcement, not regulation. As the FTC explains:
The basic statute enforced by the FTC, Section 5(a) of the FTC Act, empowers the agency to investigate and prevent unfair methods of competition, and unfair or deceptive acts or practices affecting commerce. This creates the Agency’s two primary missions: protecting competition and protecting consumers. The statute gives the FTC authority to seek relief for consumers, including injunctions and restitution, and in some instances to seek civil penalties from wrongdoers. The FTC has the ability to implement trade regulation rules defining with specificity acts or practices that are unfair or deceptive and the Commission can publish reports and make legislative recommendations to Congress about issues affecting the economy. The Commission enforces various antitrust laws under Section 5(a) of the FTC Act as well as the Clayton Act. The FTC monitors all its orders to ensure compliance.
FTC rules may be divided into three categories: section 6(g) rules, section 18 rules, and rules promulgated pursuant to statutes other than the FTC Act.
2. Section 6(g) Rules
Section 6(g) of the original Federal Trade Commission Act (“section 6(g)”) is a very short provision that empowers the FTC to “classify corporations” and also authorizes the Commission “to make rules and regulations for the purpose of carrying out the provisions of this subchapter [embodying the statutory authorities bestowed on the FTC].” Section 6(g) is a very tiny part of section 6 of the FTC Act, which delineates FTC powers to conduct investigations, issue reports, make criminal referrals to the Justice Department, cooperate with foreign enforcers, and expend funds for meetings with foreign officials and law enforcement groups. Section 6(g) primarily has been used by the Commission to enact procedural rules governing investigations and internal processes, not substantive rules dealing with business conduct.
Section 6(g) substantive rules today are subject to the informal rulemaking requirements of section 553 of the Administrative Procedure Act (APA), which apply to the vast majority of federal agency rulemaking proceedings. Informal rulemaking involves publication of a proposed rule, followed by public comment (at least 30 days), followed by publication of a final rule.
In 1971, the FTC enacted a section 6(g) rule stating that it was both an “unfair method of competition” and an “unfair act or practice” for refiners or others who sell to gasoline retailers “to fail to disclose clearly and conspicuously in a permanent manner on the pumps the minimum octane number or numbers of the motor gasoline being dispensed.” In 1973, in the National Petroleum Refiners case, the U.S. Court of Appeals for the District of Columbia Circuit upheld the FTC’s authority to promulgate this and other binding substantive rules. The court rejected the argument that section 6(g) authorized only nonsubstantive regulations regarding the FTC’s nonadjudicatory, investigative, and informative functions, spelled out elsewhere in section 6. Notably, however, the FTC has not enacted any 6(g) competition rules in the nearly fifty years since the National Petroleum Refiners case was decided.
3. Section 18 Rules
In 1975, Congress granted the FTC specific consumer protection rulemaking authority (authorizing enactment of trade regulation rules dealing with unfair or deceptive acts or practices) through section 202 of the Magnuson-Moss Warranty Act, which added section 18 to the Federal Trade Commission Act (“section 18”). Section 18 imposes hearing-type requirements that are not found in APA informal rulemakings. As the FTC explains, once the Commission has promulgated a trade regulation rule, anyone who violates the rule “with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule” is liable for civil penalties for each violation.
Section 18 consumer protection rulemakings impose adjudicatory-type hearings and other specific requirements on the FTC, unlike more flexible section 6(g) APA informal rulemakings. However, as noted above, the FTC can obtain civil penalties for knowing violation of Magnuson-Moss rules, something it cannot do if 6(g) rules are violated. Since 1975, the FTC has promulgated only seven Magnuson-Moss rules, reflecting the “slow and cumbersome” nature of those rulemakings, according to some scholarly critics. The FTC has nevertheless issued a wide variety of substantive consumer protection rules in recent decades under various special statutes directed at specific consumer protection problems identified by Congress.
4. Non-FTC Act Rules
Over the years, Congress has passed a variety of statutes empowering the FTC to address particularized problems, through FTC enforcement and rulemaking initiatives, as appropriate. There are 82 such statutes currently in force, and only 16 deal solely with competition matters. FTC rules adopted pursuant to the many specialized consumer protection statutes (most of which were adopted in recent decades) largely obviated the need for and displaced section 6(g) consumer protection rulemaking initiatives of the 1960s.
The specialized competition laws (“special competition statutes”) involve such targeted substantive and procedural topics as, for example, fisheries conservation and management, litigation settlements between patented and generic drug makers, research and production joint ventures, outer continental shelf oil and gas leases, export trade associations, and international antitrust cooperation. Any FTC rules enacted under those laws inevitably are closely tied to and limited by the specific grant of congressional authority. Only one of the competition-related statutory grants, the Hart-Scott-Rodino Act of 1976 (HSR), involves rulemaking that is highly significant to antitrust enforcement across the board. Those rules, which were first promulgated in the 1970s and have been tweaked over time, directly carry out the statutory mandate and yield finely honed guidance to the private sector (similar to the detailed guidance that non-antitrust primarily regulatory agencies typically provide). In marked contrast to HSR, the section 6(g) reference to rulemaking is an extremely short and general provision that provides no framework to guide the development of possible substantive competition rules.
5. Legal Impediments to FTC Competition Rulemaking
In order to promulgate new FTC competition rules falling outside the ambit of specialized statutes, the FTC would have to rely primarily on section 6(g). Such rulemaking endeavors would face at least five legal doctrinal obstacles.
- First, the “nondelegation doctrine” suggests that, under section 6(g), Congress did not confer on the FTC the specific statutory authority required to issue rules that address particular competitive practices.
- Second, principles of statutory construction strongly indicate that the FTC’s general statutory provision dealing with rulemaking refers to procedural rules of organization, not substantive rules bearing on competition.
- Third, even assuming that proposed competition rules survived these initial hurdles, principles of administrative law would raise the risk that competition rules would be struck down as “arbitrary and capricious.”
- Fourth, there is a substantial possibility that courts would not defer to the FTC’s construction through rulemaking of its “unfair methods of competition” as authorizing the condemnation of specific competitive practices.
- Fifth, any attempt by the FTC to rely on its more specific section 18 rulemaking powers to reach anticompetitive practices would be cabined by the limited statutory scope of those powers.
Considering these obstacles collectively, it is exceptionally unlikely that FTC competition rules will survive legal challenge.
A. Non-Delegation Doctrine
Although the non-delegation doctrine has been largely moribund over the last century, it may nevertheless be revived in an appropriate case, as five current Supreme Court Justices have spoken favorably of it in recent years. Moreover, although it seldom has been applied directly to strike down regulatory schemes, it has sometimes led the Supreme Court to narrowly construe the scope of a statutory delegation to strike down sweeping agency actions without invoking the doctrine. What’s more, the Supreme Court has held that a statutory delegation must be supported by an “intelligible principle” guiding its application. As such, The Court could well decide it appropriate to strike down far-reaching FTC rules that are based on broad and novel constructions of the vague yet expansive term “unfair methods of competition.”
B. Principles of Statutory Construction
The structure of the Federal Trade Commission Act indicates that the rulemaking referenced in section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. Although the National Petroleum Refiners decision rejected such a reading, that ruling came at a time of significant judicial deference to federal agency activism and appears dated. Furthermore, the Supreme Court’s April 2021 decision in AMG Capital Management v. FTC embodies a reluctance to read general non-specific language as conferring broad substantive powers on the FTC. This interpretive approach is in line with other Supreme Court case law that rejects finding “elephants in mouseholes.”
C. Administrative Law Principles Precluding “Arbitrary and Capricious” Agency Action
The FTC would have to provide a sufficient basis to justify a determination that a particular practice barred by rule is inevitably anticompetitive. Doing so might prove difficult, because it would be in tension with the traditional “rule of reason” analysis of antitrust litigation, which evaluates particular practices on a fact-specific, case-by-case basis. If a reviewing court were to find that the FTC rulemaking record did not sufficiently take into account potential procompetitive manifestations of a condemned practice, for example, it might decide that the rule is arbitrary and strike it down. This risk would appear to be substantial, particularly given the lack of a preexisting competition rulemaking tradition that could help guide rulemaking review by the courts. Relatedly, a novel FTC construction of “unfair methods of competition” through rulemaking that was at odds with antitrust case law could raise due process of law objections.
D. Court Deference to FTC Interpretations of “Unfair Methods of Competition” Is Unlikely
The courts would be unlikely to accord “Chevron deference” to FTC Section 6(g) rules that construed the term “unfair methods of competition” to apply to specific competitive practices. The Supreme Court has avoided applying agency regulatory interpretations to various “major questions” of great “economic and political significance” (such as, for example, disputes involving the Affordable Care Act and the application of food and drug law to tobacco products)—either by determining from the start not to apply Chevron or by finding Chevron applies but electing nevertheless to reject agency statutory constructions. Given this background, the Supreme Court could readily determine that whether a broad array of hitherto unregulated commercial practices should be newly regulated on grounds of “unfairness” poses a “major question” for Congress that is beyond the scope of the FTC’s authority, rendering Chevron inapplicable. In addition, because “unfair methods of competition” rules could implicate the substantive content of antitrust law, such rules could interfere with Justice Department antitrust prosecutorial principles. This would solidify the conclusion that FTC competition rules implicate “major questions” of antitrust policy and interagency jurisdiction that should be left to Congress, and are outside the purview of the FTC’s interpretive authority.
E. Section 18 Rulemakings and Anticompetitive Practices
Given the substantial legal risks that confront section 6(g) rulemaking, the FTC might turn to section 18 (“unfair or deceptive acts or practices”) as a possible vehicle for the promulgation of new competition rules. The scope of possible application of section 18 to competition questions is, however, quite limited at best (see here). A “deceptive act or practice,” which the FTC defines as a “misrepresentation, omission, or other practice” that misleads consumers, is naturally directed to concerns about harm directly imposed on consumers by a business practice. It does not, however, fit naturally into concerns about business behavior that harms the process of competition. As such, a “deception” theory would not appear to be a good vehicle for a competition rule. Section 5(n) of the FTC Act, required that an “unfair act or practice” must impose measurable harm on consumers who acted reasonably. Second, such harm must be greater than any countervailing benefits to competition or consumers—in short, the conduct must on net be harmful, that is, it must fail a cost-benefit test. The FTC would have a very hard time jumping through the Section 18 evidentiary hoops to show that particular business practices met this test. In addition, courts might well conclude that Congress Section 18 was not designed by Congress to apply to “unfair method of competition.” Finally, two of the five current FTC Commissioners have criticized recent FTC revisions of the Commission’s rules of practice (see here) as undermining the goals of participation and transparency that Congress sought to advance when it enacted and amended Section 18. This could make judges even more reluctant to hold that Section 18 authorized novel competition rulemaking powers.
The current FTC leadership may be expected (at least initially) to proceed with competition rulemaking efforts, given Chair Khan’s strong support for this initiative. Rulemaking, of course, requires the gathering of evidence and the taking of testimony. Moreover, new competition rules imposing limitations on specified business practices or industry sectors would likely be appealed to U.S. courts of appeal. Eventually, one would expect the Supreme Court to step in to review the legal status of a particular competition rule and, most likely, the legality of FTC competition rulemaking itself. All of this would entail a substantial commitment of scarce public and private resources and take a considerable amount of time—the current FTC leadership likely would be long gone before a final legal resolution by the Supreme Court. Yet the end result would be in all likelihood a ruling that the FTC lacked substantive competition rulemaking authority. In short, the FTC rulemaking saga would almost surely entail pure waste, to the detriment of consumer welfare, producer welfare, and sound government.