Unfair Methods of Competition Under Section 5 of the FTC Act: What is the Intelligible Principle?.

• Author: Gregory J. Werden
• Pages: 819-876

819

UNFAIR METHODS OF COMPETITION

UNDER SECTION5 OF THE FTC ACT:

WHAT IS THE INTELLIGIBLE PRINCIPLE?

G J. W*

INTRODUCTION ......................................... 819

I. THE ORIGIN AND LEGISLATIVE HISTORY

OF THE FTC ACT ..................................... 821

A. F Standard Oil   S B ................ 821

B. T S S B ........................ 827

C. T C R  F V ............ 838

D. W D C I? ........................ 840

II. THE LAW OF UNFAIR METHODS OF COMPETITION ..... 847

A. S C D B 1965 ............... 847

B. S C D  1965 ................ 851

C. A D A 1980 .................... 855

D. D  C L ........................... 858

III. THE 2022 FTC POLICY STATEMENT .................... 866

A. I  C ................................ 867

B. T M  “U M

 C” ................................... 870

CONCLUSION ........................................... 874

INTRODUCTION

The Federal Trade Commission (FTC) Act1 and the Clayton Act2

supplemented the Sherman Act.3 The FTC Act added a new enforcer

and a new prohibition—on “unfair methods of competition” (the UMC

1 Ch. 311, 38 Stat. 717 (1914) (codified at 15 U.S.C. §§41–58).

2 Ch. 323, 38 Stat. 730 (1914) (codified at 15 U.S.C. §§12–18, 19, 21–27).

3 Ch. 647, 26 Stat. 209 (1890) (codified at 15 U.S.C. §§1–7).

* Visiting Scholar at the Mercatus Center at George Mason University. Formerly Senior

Economic Counsel in the Antitrust Division, U.S. Department of Justice.

820 A L J [Vol. 85

prohibition).4 Members of Congress appreciated that the Constitution did

not permit the delegation of legislative power to a commission5 and acted

on the belief that the indefinite UMC prohibition would pass constitutional

muster and usefully guide both the FTC and the courts.

An indefinite prohibition does not unconstitutionally delegate if it conveys

an “intelligible principle.”6 As Justice Elena Kagan explained, the “nondel-

egation inquiry always begins (and often almost ends) with statutory inter-

pretation. The constitutional question is whether Congress has supplied an

intelligible principle to guide the delegee’s use of discretion. So the answer

requires construing the challenged statute to figure out what task it delegates

and what instructions it provides.”7 The Supreme Court, however, never fully

worked out the instructions for the UMC prohibition.

This article reviews the origins and legislative history of the FTC Act to

glean the instructions Congress intended and identifies seven points on which

members of Congress appear to have agreed. These seven points remain a

useful starting point for interpreting the UMC prohibition. The review also

identifies an overarching conceptual standard for deciding whether a practice

or course of conduct violates the UMC prohibition, although agreement on

this standard is less clear.

The UMC prohibition’s draftsman and its leading supporters in the Senate

asserted an efficiency standard developed by economists: Efficiency-based

competition on the merits was “fair,” while excluding rivals on a basis other

than efficiency was “unfair.” Although consensus on this concept was not evi-

dent in the legislative history, no member of Congress expressed disagreement.

This standard can be a critical limiting principle for the UMC prohibition.

4 FTC Act, ch. 311, §5, 38 Stat. 717, 719 (1914) (codified at 15 U.S.C. §45(a)(1)). The

Wheeler-Lea Act amended Section 5 by inserting a prohibition on “unfair or deceptive acts or

practices.” Federal Trade Commission Act, Amendments, Pub. L. No. 75-447, § 3, 52 Stat. 111.

Enforcing that prohibition is part of the FTC’s consumer protection mission and is not discussed

in this article.

5 See, e.g., 51 C. R. 13063–64 (1914) (July 31 comments of Sen. Moses E. Clapp

(R-Minn.)) (“[I]f this proposed law does mean... that this commission may declare a thing

unlawful which Congress has not declared unlawful... then it is the abdication of legislative

power, pure and simple, and is the most revolutionary proposition that has come before Congress

in the long history of this Republic.”); see also Interstate Com. Comm’n v. Goodrich Transit

Co., 224 U.S. 194, 214 (1912) (“The Congress may not delegate its purely legislative power to

a commission, but, having laid down the general rules of action under which a commission shall

proceed, it may require of that commission the application of such rules to particular situations

and the investigation of facts, with a view to making orders in a particular matter within the rules

laid down by the Congress.”).

6 See J.W. Hampton, Jr. & Co. v. United States, 276 U.S. 394, 409 (1928) (“If Congress shall

lay down by legislative act an intelligible principle... such legislative action is not a forbidden

delegation of legislative power.”); see also Whitman v. Am. Trucking Ass’ns, 531 U.S. 457,

472–75 (2001); Mistretta v. United States, 488 U.S. 361, 371–74 (1989).

7 Gundy v. United States, 139 S. Ct. 2116, 2123 (2019) (plurality opinion).

2024] U M  C 821

This article also reviews jurisprudence on the UMC prohibition, which

is less revealing than its origin story. Reasoning that the spirit of the Sher-

man Act animated the UMC prohibition, courts declared that it must reach

all anticompetitive conduct. But development of the law stalled before the

prohibition’s intelligible principle could crystallize. The Supreme Court last

interpreted the UMC prohibition in 1972, and the last significant appellate

decision was in 1984.

Drawing on antitrust developments over the past half-century, as well as all

that came before, this article articulates four basic principles:

1. The UMC prohibition serves only to protect the competitive process.

2. The UMC prohibition does not interfere with competition on the

merits.

3. The UMC prohibition protects only the public interest in competition.

4. The UMC prohibition reaches beyond the Sherman and Clayton

Acts only to conduct that is anticompetitive on its face or has a

reasonable probability of significantly harming competition.

This article also critiques the FTC’s November 10, 2022, policy statement

on the UMC prohibition (FTC Policy Statement), which was meant “to assist

the public, business community, and antitrust practitioners by laying out the

key general principles that apply to whether business practices constitute unfair

methods of competition under Section 5 of the FTC Act.”8 The FTC Policy

Statement paints a misleading portrait of congressional intent and interprets

the UMC prohibition in a manner at odds with the spirit of the Sherman Act.

I. THE ORIGIN AND LEGISLATIVE HISTORY OF THE FTC ACT

A. F Standard Oil   S B

The origin story for the FTC Act could begin with the 1903 creation of the

Bureau of Corporations,9 with the 1890 enactment of the Sherman Act,10 or

8 Policy Statement Regarding the Scope of Unfair Methods of Competition under Section

5 of the Federal Trade Commission Act, F. T C’ 2 (Nov. 10, 2022), www.ftc.

gov/ system/ files/ ftc_gov/ pdf/ P221202Section5Policy Statement. pdf [hereinafter FTC Policy

Statement]. The statement was adopted shortly after the departure of one Republican commis-

sioner and over the dissent of the other. Dissenting Statement of Commissioner Christine S.

Wilson Regarding the “Policy Statement Regarding the Scope of Unfair Methods of Competition

Under Section 5 of the Federal Trade Commission Act,” F. T C’ 1 (Nov. 10, 2022),

www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf.

9 The Bureau of Corporations was created as part of the new Department of Commerce and

Labor. See Ch. 552 § 6, 32 Stat. 825, 827–28 (1903).

10 See Neil W. Averitt, The Meaning of “Unfair Methods of Competition” in Section 5 of the

Federal Trade Commission Act, 21 B.C. L. R. 227, 230 (1980).