Uncertainty Remains More Than One Year After the FTC Announces New “Unfair Methods of Competition” Policy

White & Case LLP¹

On November 10, 2022, the Federal Trade Commission announced a significant change in how the FTC plans to enforce Section 5 of the FTC Act, which bans "unfair methods of competition in or affecting commerce." In doing so, the FTC reversed a longer-standing bipartisan policy that limited unfair-competition enforcement to antitrust violations. The new policy statement's broad focus on conduct beyond the focus of the federal antitrust laws was immediately met with criticism, particularly concerning the FTC's authority to challenge a broad array of conduct that it may unilaterally deem to be unfair.² At the same time, the FTC emphasized that the policy reversal was necessary to restore the FTC's full legal authority and pursue rigorous enforcement against companies that use unfair tactics to gain an advantage instead of competing on the merits.³

This article examines how the FTC has invoked this new enforcement approach in the year since it announced its new Section 5 enforcement policy and some of the legal challenges that the FTC faces going forward. In particular, this article covers:

• the FTC's shifting policy regarding "unfair methods of competition" and the Commission's more aggressive focus on policing conduct beyond the purview of the antitrust laws;
• the FTC's unprecedented crackdown on noncompete agreements as an unfair method of competition;
• the FTC's recent challenge to a private-equity firm's acquisition on the basis that the deal "may facilitate" an anticompetitive information exchange and thus is an unfair method of competition; and
• the FTC's other likely areas of focus, including business practices involving exclusivity arrangements, rebates, price discrimination, and acquisitions, as well as specific industries such as the health care and technology sectors.

The FTC's Shifting Policy Regarding “Unfair Methods of Competition”

In 1914, Congress passed the Federal Trade Commission Act. Section 5 of the FTC Act makes "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce" unlawful.⁴ Section 5, however, does not define specific acts or practices that constitute "unfair methods of competition," which has led to a longstanding debate about the scope of the FTC's enforcement authority.

While the FTC had previously brought some standalone Section 5 cases that did not necessarily involve antitrust violations, the FTC faced a series of litigation losses in the 1980s, which largely led the FTC to limit Section 5 enforcement to alleged antitrust violations.⁵ In 2015, a bipartisan majority of the Commission—consisting of then-Commissioners Ramirez, Brill, Wright, and McSweeny—issued a policy statement formally committing to use Section 5 in a way that is "aligned with the other antitrust laws, which have evolved over time and are guided by the goal of promoting consumer welfare and informed by economic analysis."⁶ The Commissioners sought to "rely on the accumulated knowledge and experience embedded within the 'rule of reason' framework developed under the antitrust laws over the past 125 years—a framework well understood by courts, competition agencies, the business community, and practitioners."⁷

By 2021, shortly after the election of President Biden, a new slate of Commissioners began laying the groundwork for a more expansive application of Section 5. In July 2021, the Commission voted 3-2 along party lines to rescind the 2015 policy statement.⁸ Chair Lina Khan, along with two other Democrat-appointed Commissioners, issued a statement calling the 2015 policy "shortsighted" and vowing to "follow the congressional mandate to condemn 'unfair methods of competition,'" which they explained "is crucial to bringing the FTC back in line with its statutory obligations."⁹ The two Republican-appointed Commissioners at the time, Christine Wilson and Noah Phillips, voted against the policy change. Among other criticisms, the dissenting Commissioners focused on the lack of transparency, clarity, and legal support for how Section 5 might be broadly enforced beyond established antitrust laws.¹⁰

By November 2022, the FTC issued another policy statement, again divided along party lines, announcing that the FTC intends to use Section 5's ban on "unfair methods of competition" to police conduct beyond the focus of federal antitrust laws. The statement takes the new position that the FTC need not demonstrate actual anticompetitive harm or market power under Section 5, as required under the antitrust laws, and broadly targets conduct that is "coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature," and that "tend[s] to negatively affect competition."¹¹ The policy statement further identifies what it views as "historical examples of unfair competition," including contractual arrangements involving "incipient violation of the antitrust laws," such as "loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent's position within the industry."¹²

In a dissenting statement, then-Commissioner Wilson criticized the new policy as departing from the demands of due process in which "the lines between lawful and unlawful conduct [can] be drawn clearly," particularly "when the enforcer at issue promises a new era of aggressive action."¹³ The dissent focuses on the lack of "meaningful guidance for businesses" and implications arising from the Commission's "I know it when I see it" approach in which "the Commission has the authority summarily to condemn essentially any business conduct it finds distasteful."¹⁴

The FTC Invokes Its New Policy in an Unprecedented Crackdown on Noncompete Agreements

At the start of 2023, the FTC put its new policy to work for the first time by filing a series of administrative actions challenging the use of noncompete agreements as violations of Section 5's ban on unfair methods of competition.¹⁵ The Commission voted 3-1 to issue the administrative complaints and to accept the accompanying consent decrees halting the use of those noncompete agreements.¹⁶ Because the respondent companies immediately agreed to resolve the administrative complaints by consent decree, the FTC's authority under Section 5 went untested.

Issuing a dissenting statement, however, then-Commissioner Wilson emphasized her "continuing disagreement with the new Section 5 Policy Statement and its application to these facts."¹⁷ She criticized the FTC's administrative complaints for failing to offer any evidence of anticompetitive effect in any relevant markets and other factual support.¹⁸ She observed that such an approach "foreshadows how the Commission will apply the new Section 5 Policy Statement" and sets a dangerous precedent where business practices that "three unelected bureaucrats find distasteful will be labeled with nefarious adjectives and summarily condemned, with little to no evidence of harm to competition."¹⁹

In addition to the administrative complaints, the FTC announced a proposed regulatory rule that would ban virtually all noncompete agreements nationwide, largely overriding many established state laws that take a case-by-case approach to noncompete enforcement and that at the very least recognize the need to protect against the disclosure of trade secrets, customer lists, and other confidential and proprietary information.²⁰ The FTC received over 26,000 comments related to its proposed rule, ranging from praise over how a ban will help protect certain low-wage workers to harsh criticisms concerning the near blanket ban's failure to account for business justifications for noncompetes.

As relevant here, many of the rulemaking comments challenged whether the FTC even has the authority to ban noncompete agreements under Section 5. For example, the U.S. Chamber of Commerce's comment opposed the proposed rule, primarily for three reasons:

• First, the Commission is not authorized under the FTC Act to promulgate binding regulations related to "unfair methods of competition" because Section 6(g) of the FTC Act narrowly grants the Commission authority to "develop internal procedural rules related to its powers to investigate suspected violations of the law and to publish reports."²¹ As the comment details, "Section 6(g) says nothing whatsoever about unfair methods of competition or any other substantive authority of the Commission."²²
• Second, "noncompete agreements have never been considered per se violations of the antitrust laws," and "numerous court decisions have recognized the procompetitive benefits of such agreements and have upheld them against challenges under the FTC Act and the Sherman Act."²³ If the ban on unfair methods of competition can "prohibit agreements not shown to limit competition in any way, then the Commission's authority under the FTC Act would lack any intelligible limiting principle and reflect an unconstitutional delegation of legislative power."²⁴
• Third, the proposal is arbitrary and capricious decision-making in violation of the Administrative Procedure Act for several reasons. For instance, the proposed rule (i) is based on the flawed conclusion "that the benefits of noncompetes—including intellectual-property and goodwill protection and investments in the labor force—can be achieved through other means," and (ii) fails "to justify the considerable breadth of the Noncompete Rule—which applies to independent contractors, exempt organizations, and most agreements connected to the sale of a business—or to account for the significant uncertainty created by many aspects of the Noncompete Rule, such as its definition of 'de facto' noncompete agreements."²⁵

Other organizations and scholars have raised similar concerns, and the FTC is currently considering those comments.²⁶ The FTC is expected to vote on the final rule in April 2024 and legal challenges to the FTC's authority are expected to follow.²⁷

The FTC Next Uses Its New Unfair-Competition Policy to Target Information Exchanges

Following a 3-0 Commission vote, the FTC next invoked its unfair-competition authority in an administrative complaint seeking to unwind a $5.2 billion cash-and-stock deal between a private-equity firm and natural-gas producer.²⁸ The respondent companies almost simultaneously agreed to a consent decree in August 2023, which the FTC characterized as "ground-breaking structural relief" that prohibits the private equity firm from occupying a seat on the gas producer's board, requires the private-equity firm to divest shares in the gas producer, prevents the potential for unlawful information exchanges, and unwinds a separate joint venture between the two entities.²⁹

This was the first case in 40 years in which the FTC sought to enforce Section 8 of the Clayton Act, which prohibits a person from holding a board seat on the board of two competing companies when certain thresholds are met. The FTC also invoked Section 5 of the FTC Act in alleging that the deal would have enabled both companies to "access and exchange confidential business information, and influence or direct [the gas producer's] competitive actions or strategies," creating "an unfair method of competition in violation of the FTC Act."³⁰

Notably, the administrative complaint's Section 5 claim targeted an arrangement that "may facilitate" an anticompetitive information exchange, meaning that no antitrust violation had actually occurred.³¹ Indeed, under the Sherman Act, absent an agreement to fix prices or allocate markets, even an actual information exchange is not an antitrust violation unless it harms competition under the highly fact-specific rule-of-reason analysis, which weighs anticompetitive and procompetitive effects. As with the FTC's challenge to noncompete agreements, by quickly securing a consent decree, the FTC's Section 5 authority again went unchallenged.

What's Next for the FTC?

Beyond the steps taken above, FTC officials have been fairly quiet about what enforcement actions or proposed rulemaking we might see next. Even so, several potential areas are likely candidates for the FTC to pursue going forward.

Exclusivity Arrangements. The FTC has consistently focused on exclusivity arrangements, including by considering potential rulemaking in this area,³² and referencing exclusive-dealing arrangements nearly a dozen times in the November 2022 policy statement.³³ Whether the FTC ever tries to move forward with such an unfair-competition rule will likely depend on how legal challenges to the FTC's proposed noncompete rule play out. Moreover, it may prove difficult for the FTC to propose a rule that can address the fact-specific inquiry that is often necessary to assess the effect of exclusivity provisions. After all, the FTC itself recognizes that exclusivity provisions "between manufacturers and retailers are common and generally lawful,"³⁴ and the FTC has recently faced setbacks when challenging exclusivity provisions, such as in FTC v. Endo.³⁵

Rebates and Price Discrimination. Many observers also expect the FTC to target other types of common agreements and business practices, such as loyalty rebates or when companies charge different prices to different customers based on factors such as the amount of product the customer buys.³⁶ Both rebates and price discrimination are repeatedly mentioned in the FTC's November 2022 policy statement,³⁷ and the FTC has continued to focus on these issues. As discussed below, more recent FTC policy statements have identified rebate practices as a top FTC priority, particularly in the health-care industry.³⁸ And, in January 2023, reports surfaced that the FTC was investigating several beverage manufacturers for potential price-discrimination violations—an area that the FTC has not focused on in over 20 years.³⁹

Merger Control. The November 2022 policy statement also focused on merger control by targeting (i) mergers "that have the tendency to ripen into violations of the antitrust laws," (ii) serial mergers "that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws," and (iii) "mergers or acquisitions of a potential or nascent competitor that may tend to lessen current or future competition."⁴⁰ The FTC/DOJ's draft merger guidelines from July 2023 reflect some of the same themes, focusing on firms that allegedly "consolidate markets through roll-up strategies that rely on a series of smaller acquisitions,"⁴¹ as well as companies that acquire nascent competitors to eliminate potential competition.⁴² The FTC and DOJ finalized these revised merger guidelines in December 2023.

Health-Care Industry. The FTC has also continued to focus on the role of Pharmacy Benefit Managers (PBMs), Group Purchasing Organizations (GPOs), and other "middlemen" in the health-care industry and their effect on drug pricing. In the last two years alone, the FTC has opened a Section 6(b) inquiry under the FTC Act into PBM practices to assess the effect of manufacturer rebates and other business practices on formulary design and drugs costs, issued several policy statements emphasizing that this area is a "top priority," and withdrew prior guidance and advocacy statements supporting certain PBM practices.⁴³ The FTC also recently issued a policy statement in September 2023 stating that "brand drug manufacturers may be harming generic competition through the improper listing of patents in the Food and Drug Administration's ('FDA') Approved Drug Products with Therapeutic Equivalence Evaluations, known as the 'Orange Book.'"⁴⁴ That statement repeatedly invokes the FTC's authority to challenge unfair methods of competition and expressly references the FTC's November 2022 policy statement,⁴⁵ although the FTC has yet to bring any such enforcement actions.

Tech Industry. Technology companies have long been a key focus of the FTC, particularly Chair Lina Khan. The November 2022 policy statement certainly had the tech sector in mind, observing that unfair methods of competition can include, for example, "utilizing technological incompatibilities to negatively impact competition in adjacent markets."⁴⁶ Since November 2022, we have seen the FTC challenge several merger and non-merger business practices in this sector. And, the FTC's Bureau of Competition, along with its newly created Office of Technology, have expressed concerns about how artificial intelligence may be used by incumbent technology companies "that control key inputs or adjacent markets, including the cloud computing market, may be able to use unfair methods of competition to entrench their current power or use that power to gain control over a new generative AI market."⁴⁷

Conclusion

While FTC policy statements and other commentary may provide some insight into where the FTC may strike next under Section 5, the range of potential challenges is virtually endless under the FTC's broad and unilateral enforcement approach. Challenges to the FTC's enforcement and rulemaking authority related to noncompete agreements will likely be a key inflection point that either curbs the Commission's aggressive agenda or invigorates an even bolder enforcement strategy. In the meantime, companies should carefully monitor any guidance from the FTC, and ensure that their compliance programs are updated and internal mechanisms are in place for reviewing business practices that may involve increased legal risks.

_{1 White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities. This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
2 See, e.g., Fed. Trade Comm'n, Dissenting Statement of Commissioner Christine S. Wilson, Open Commission Meeting (July 1, 2021), https://www.ftc.gov/system/files/documents/public_statements/1591554/p210100wilsoncommnmeetingdissent.pdf.
3 Fed. Trade Comm'n, FTC Restores Rigorous Enforcement of Law Banning Unfair Methods of Competition, Press Release (Nov. 10, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/11/ftc-restores-rigorous-enforcement-law-banning-unfair-methods-competition.
4 15 U.S.C. § 45(a)(1).
5 Fed. Trade Comm'n, Statement of Chair Lina M. Khan, joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya On the Adoption of the Statement of Enforcement Policy Regarding Unfair Methods of Competition Under Section 5 of the FTC Act, at 3 (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Section5PolicyStmtKhanSlaughterBedoyaStmt.pdf.
6 Fed. Trade Comm'n, Statement of Chairwoman Ramirez and Commissioners Brill and McSweeny On the Issuance of Enforcement Principles Regarding "Unfair Methods of Competition" Under Section 5 of the FTC Act (Aug. 13, 2015), https://www.ftc.gov/system/files/documents/public_statements/735381/150813commissionstatementsection5.pdf.
7 Id.
8 Fed. Trade Comm'n, FTC Rescinds 2015 Policy that Limited Its Enforcement Ability Under the FTC Act, Press Release (July 1, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/07/ftc-rescinds-2015-policy-limited-its-enforcement-ability-under-ftc-act.
9 Id.
10 Fed. Trade Comm'n, Remarks of Commissioner Noah J. Phillips Regarding the Commission's Withdrawal of the Section 5 Policy Statement (July 1, 2021), https://www.ftc.gov/system/files/documents/public_statements/1591578/phillips_remarks_regarding_withdrawal_of_section_5_policy_statement.pdf; Dissenting Statement, supra note 2.
11 Fed. Trade Comm'n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the FTC Act, at 1 (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf.
12 Id.
13 Dissenting Statement, supra note 2.
14 Id.
15 Adam Acosta, Eric Grannon, and Tola Oyeyemi, Four Takeaways From The FTC's Unprecedented Crackdown On Noncompete Agreements, White & Case LLP (Jan. 6, 2023), https://www.whitecase.com/insight-alert/four-takeaways-ftcs-unprecedented-crackdown-noncompete-agreements.
16 Id.
17 Fed. Trade Comm'n, Dissenting Statement of Commissioner Christine S. Wilson, In the Matter of Prudential Security, File No. 211-0026 (Jan. 4, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/wilson_dissenting_statement_-_prudential_security_-_final_-_1-3-23.pdf; see also Fed. Trade Comm'n, Dissenting Statement of Commissioner Christine S. Wilson, In the Matters of O-I Glass, Inc. and Ardagh Group, S.A., File No. 211-0182 (Jan. 4, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/wilson-dissenting-statement-glass-container-cases.pdf.
18 Fed. Trade Comm'n, Dissenting Statement of Commissioner Christine S. Wilson, In the Matter of Prudential Security, File No. 211-0026 (Jan. 4, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/wilson_dissenting_statement_-_prudential_security_-_final_-_1-3-23.pdf.
19 Id.
20 Acosta et al., supra note 15.
21 U.S. Chamber of Com., Letter from U.S. Chamber of Commerce, Notice of Proposed Rulemaking, Fed. Trade Comm'n; Noncompete Clause Rule, at 2 (Apr. 17, 2023), https://www.uschamber.com/assets/documents/FTC-Noncompete-Comment-Letter_FINAL_04.17.23.pdf.
22 Id.
23 Id. at 19.
24 Id. at 2.
25 Id. at 28.
26 See, e.g., U.S. Council for Int'l Bus., U.S. Council for Int'l Business Comments on the Fed. Trade Comm'n Noncompete Clause Rulemaking (Apr. 19, 2023), https://uscib.org/uscib-content/uploads/2023/05/USCIB-2023-Submission-to-ITC-on-Non-Competes-Proposal.pdf; Richard Pierce, The FTC Doesn't Have the Power to Issue Substantive Rules, Bloomberg Law (Aug. 9, 2023), https://news.bloomberglaw.com/us-law-week/the-ftc-doesnt-have-the-power-to-issue-substantive-rules.
27 Dam Papscun, FTC Expected to Vote in 2024 on Ban Noncompete Clauses, Bloomberg Law (May 10, 2023), https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses.
28 Fed. Trade Comm'n, FTC Acts to Prevent Interlocking Directorate Arrangement, Anticompetitive Information Exchange in EQT, Quantum Energy Deal, Press Release (Aug. 16, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/08/ftc-acts-prevent-interlocking-directorate-arrangement-anticompetitive-information-exchange-eqt.
29 Id.
30 Id.
31 Compl. ¶ 32, In the Matter of QEP Partners/EQT Corp., File No. 221-0212 (Aug. 16, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/2220212eqtquantumcomplaint.pdf.
32 U.S. Chamber of Com., Letter from U.S. Chamber of Commerce to the Fed. Trade Comm'n, Solicitation for Public Comments on Contract Terms that May Harm Competition, Relating to Exclusive Contracts (Sept. 29, 2021), https://www.uschamber.com/assets/documents/210927_comments_exclusionarycontracts_ftc.pdf.
33 Fed. Trade Comm'n, FTC Restores Rigorous Enforcement of Law Banning Unfair Methods of Competition, Press Release, at 12 (Nov. 10, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/11/ftc-restores-rigorous-enforcement-law-banning-unfair-methods-competition (emphasis added); Fed. Trade Comm'n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the FTC Act, at 1 (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf.
34 Fed. Trade Comm'n, Exclusive Dealing or Requirements Contracts, https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/dealings-supply-chain/exclusive-dealing-or-requirements-contracts.
35 FTC v. Endo Pharm. Inc., No. 22-5137, 2023 U.S. App. LEXIS 22428 (D.C. Cir. Aug. 25, 2023).
36 Sean Heather, What Does the FTC Want to Ban Next?, U.S. Chamber of Com. (Jan. 31, 2023), https://www.uschamber.com/finance/antitrust/what-does-the-ftc-want-to-ban-next.
37 Policy Statement, supra note 33.
38 Adam Acosta, Eric Grannon, et al., FTC v Actavis and Pricing Practices Spearhead Rise in US Pharmaceutical Antitrust Cases, Global Competition Review (Aug. 25, 2023), https://globalcompetitionreview.com/review/the-antitrust-review-of-the-americas/2024/article/ftc-v-actavis-and-pricing-practices-spearhead-rise-in-us-pharmaceutical-antitrust-cases.
39 Josh Sisco, Pepsi, Coke Soda Pricing Targeted in New Federal Probe, Politico (Jan. 10, 2023), https://www.politico.com/news/2023/01/09/pepsi-coke-soda-federal-probe-00077126.
40 Policy Statement, supra note 33, at 13-14 (emphasis added).
41 Statement of Chair Lina M. Khan, joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya Regarding FTC-DOJ Proposed Merger Guidelines Commission, File No. P234000, at 2 (July 19, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/p234000_chair_statement_re_draft_merger_guidelines.pdf.
42 U.S. Dep't of Justice and Fed. Trade Comm'n, Proposed Merger Guidelines No. 4, https://www.ftc.gov/system/files/ftc_gov/pdf/p859910draftmergerguidelines2023.pdf.
43 Adam Acosta, Eric Grannon, et al., FTC v Actavis and Pricing Practices Spearhead Rise in US Pharmaceutical Antitrust Cases, Global Competition Review (Aug. 25, 2023), https://globalcompetitionreview.com/review/the-antitrust-review-of-the-americas/2024/article/ftc-v-actavis-and-pricing-practices-spearhead-rise-in-us-pharmaceutical-antitrust-cases.
44 Fed. Trade Comm'n, Statement Concerning Brand Drug Manufacturers' Improper Listing of Patents in the Orange Book, at 1 (Sept. 20, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/p239900orangebookpolicystatement092023.pdf.
45 Id. at 5 n.25.
46 Policy Statement, supra note 33, at 15.
47 Fed. Trade Comm'n, Generative AI Raises Competition Concerns, Technology Blog (June 29, 2023), https://www.ftc.gov/policy/advocacy-research/tech-at-ftc/2023/06/generative-ai-raises-competition-concerns.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2024 White & Case LLP}