A Procedural Approach to "Unfair Methods of Competition"

Author:Andy J. Miller
Position:J.D., The University of Iowa College of Law

Section 5 of the Federal Trade Commission Act authorizes the Federal Trade Commission ("FTC") to condemn "unfair methods of competition." A perennial question has been whether the FTC may use section 5 to condemn acts that do not violate the antitrust laws. In March 2006, the FTC did just that by condemning an invitation solely to collude as a section 5 violation. Then, in July 2006, Commissioner ... (see full summary)


J.D., The University of Iowa College of Law, 2008; A.M., Harvard University, 2004; M.A., Emory University, 2003; B.A., The University of Missouri at Kansas City, 1997.

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I Introduction

In September 2004, Richard Posner gave a speech at the Federal Trade Commission ("FTC" or "Commission") on the occasion of its ninetieth anniversary in which he addressed, among other things, the scope of section 5 of the Federal Trade Commission Act ("FTC Act" or "Act"), a section that prohibits, in part, "unfair methods of competition."1 "It used to be thought," Judge Posner opined, that this language "swept further than the practices forbidden by the Sherman and Clayton Acts, and you find this point repeated occasionally even today, but it is no longer tenable."2 Fewer than two years later, the Commission and a couple of its members offered something of a riposte: in March 2006, the Commission condemned Valassis Communications, Inc.'s invitation to collude as a section 5 violation;3 in July 2006, Commissioner J. Thomas Rosch, while commenting on Valassis, reiterated the Agency's authority to condemn certain conduct under section 5 alone;4 and in August 2006, Commissioner Jon Leibowitz penned a strongly worded concurrence in which he forcefully reasserted section 5 jurisdiction as a mechanism for reaching "conduct that violates not only the antitrust laws themselves, but also the policies that those laws were intended to promote."5 Thus, the Commission seems to have taken it upon itself to decide whether a broad reading of section 5 is or is not tenable. Page 1488

At its core, the dispute illustrated here is about the relationship between the antitrust laws6-primarily the Sherman7 and Clayton8 Acts-and the FTC Act.9 The FTC Act, passed in 1914, created the FTC.10 Two texts endow that body with the authority to enforce the antitrust laws. The first is the Clayton Act itself (passed simultaneously with the FTC Act), which "commits its enforcement to the FTC as well as to the Justice Department and the courts."11 The second text is section 5 of the FTC Act. This section enables the Commission to condemn "unfair methods of competition,"12 and through this provision, the FTC can condemn conduct that violates either the Sherman Act or the Clayton Act.13 Thus, the FTC has the authority to enforce the antitrust laws, but can it use its section 5 authority to do more than that? May it, for example, go after conduct that violates the "spirit" of the antitrust laws or that is simply "unfair" in some other way, but does not violate the "letter" of the antitrust laws?14 Simply put, can the FTC condemn as "unfair" conduct that the antitrust laws cannot reach?

There are at least three possible interpretations of section 5 (and the reader should keep these interpretations in mind, as they will continually reappear throughout this Note): (1) The FTC may use its section 5 authority to go after only that behavior that violates the antitrust laws; (2) The FTC may enjoin as "unfair methods of competition" conduct that the antitrust Page 1489 laws cannot reach-i.e., conduct that does not violate the antitrust laws; or (3) The FTC not only may go after conduct that does not violate the antitrust laws, but also may choose to condemn conduct as a "pure Section 5 violation."15

The flurry of activity in the spring and summer of 2006 indicates that the Commission, as currently configured, clearly believes that it has the authority to use section 5 as a stand-alone enforcement mechanism. In other words, the current Commission eschews the first possibility. It is not clear, however, which of the remaining two possibilities is currently operable. As this Note discusses,16 Commissioner Liebowitz, who proposes the broadest interpretation of section 5 and couples that interpretation with a quite detailed definition of a "pure Section 5 violation,"17 seems to endorse interpretation (3). Commissioner Rosch, on the other hand, though he seems willing to agree with Commissioner Leibowitz that, at the very least, there is such a thing as a "pure" section 5 violation, goes on to suggest that the Commission ought not condemn conduct that violates the antitrust laws as pure section 5 violations.18 Thus, he seems to be endorsing interpretation (2).

This Note argues that, as a threshold matter, Commissioner Rosch is correct-the FTC may enjoin as unfair methods of competition conduct that the antitrust laws cannot reach. Yet more needs to be done to clarify the relationship between section 5 and the antitrust laws. This Note argues that that relationship ought to be co-dependent. To that end, section 5 violations ought to be approached procedurally, and this is why Commissioner Leibowitz's attempt to offer a wholly substantive account of section 5 violations fails. This Note shows that, as a practical matter, both Commissioner Rosch's and Commissioner Leibowitz's views impel the FTC to ask, in the first instance, whether the conduct before the Commission qualifies as conduct that violates the antitrust laws. One cannot, after all, assert that section 5 theoretically reaches conduct that lies beyond the antitrust laws unless one already knows that that conduct does or does not fall within the antitrust laws. The FTC, then, always faces this threshold question: Has there been an antitrust violation? Once one recognizes that this question always imbues the section 5 analysis, the Commission's manner of approaching possible section 5 violations becomes much more procedural than substantive. As a procedural matter, the FTC should always begin its section 5 analysis by asking whether the conduct at issue violates Page 1490 the antitrust laws. The question will then become this: What role does section 5 play when the answer to that threshold question is "yes," and what role does it play when the answer to that question is "no"?

This Note argues that if the answer to that threshold question is "yes," then the FTC is dealing with an antitrust violation, and it ought to condemn that activity as a violation of the antitrust laws. As this Notes discusses, Commissioner Rosch seems to agree; he specifically notes, with reference to the Valassis decision, that "the Commission's action in Valassis should not be read to endorse the treatment of conduct as an unfair method of competition when the conduct is plainly governed by the Sherman Act."19(This also is precisely where Commissioner Rosch and this Note part company with Commissioner Leibowitz.20) If, on the other hand, the FTC answers the threshold question "no," then the FTC is not dealing with an antitrust violation. This Note argues that in this instance, the Commission should then ask whether the conduct in question, if it continued unabated, eventually would lead to an antitrust violation. Only if the Commission can confidently answer that question affirmatively should it enjoin the behavior under section 5. In other words, "pure" section 5 violations exist if and only if the conduct at issue will result in an antitrust violation if left unchecked. As we will see, the Valassis case serves as an excellent illustration of this point.

This Note begins, by way of orientation, with a brief sketch of the background of the FTC Act and a short discussion of the way in which both the FTC itself and section 5 interact with the antitrust laws. This history is meant to be cursory, but it will nonetheless show that the legislative history of the FTC Act, Supreme Court interpretations of that Act, and appellate- court decisions all tilt the balance in favor of interpretation (2) and against interpretations (1) and (3). Part III then delineates three recent FTC interpretations-the March 2006 Valassis case, the July 2006 comments by Commissioner Rosch, and the August 2006 concurrence by Commissioner Leibowitz. With these FTC interpretations of the scope of section 5 in hand, this Note finally develops the argument outlined briefly above.

II Background
A From The Sherman Act Of 1890 To The Presidential Election Of 1912

Section 1 of the Sherman Act prohibits "[e]very contract, combination . . . or conspiracy, in restraint of trade."21 Section 2 renders it a felony for anyone to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or Page 1491 commerce among the several states."22 Passed in 1890, the Sherman Act itself did not initially create an administrative agency to enforce its provisions, relying instead on the Department of Justice ("DOJ") and the judiciary.23 Perceived failures in the initial application of the law led early on to calls for reform.24 Such calls were, in part, reactions to the size and power of trusts, such as Rockefeller's Standard Oil, which continued to grow despite the existence of the Sherman Act. As one popular historian has put it, such companies had amassed so much power that legislating against them was often "like passing a law against the wind."25 Yet when the Court finally did get around to breaking up Standard Oil,26 rather than mollifying antitrust law detractors, the Court enlivened those detractors by announcing the "Rule of Reason" analysis that was to guide much of antitrust jurisprudence.27 Page 1492

Following the Standard Oil decision, as Commissioner Leibowitz noted, "Many within and outside of Congress viewed the Supreme Court's reasonableness test as judicial invention-what some more recently would term 'legislat[ing] from the...

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