Unfair Methods of Competition under FTC § 5: Beyond the Sherman Act and an Ex Post Model of Enforcement

• Date: 01 December 2011
• DOI: 10.1177/0003603X1105600405
• Published date: 01 December 2011
• Subject Matter: Article

Unfair methods of competition under

FTC § 5: Beyond the Sherman Act

and an ex post model of enforcement

BYRUDOLPH J.R. PERITZ*

The Federal Trade Commission is an agency that is independent of the

executive branch but not of the judiciary. Although the courts have

recognized expansive Commission authority, they have too often

applied Sherman Act standards as if the Commission were the Antitrust

Division. Three Commission losses from the 1980s retain undue

influence although both the times and the Commission have changed.

Unlike the Antitrust Division, the Commission has a mandate to

push past the antitrust laws. Its institutional advantage lies in

investigation and innovation, not in enforcement ex post. Its mission

is to work at the cutting edge of economic theory, to engage in

research and development of competition policy at the forefront of

changing commercial circumstances.

The article intends, first, to defuse the lingering in terrorem effects

of the 1980s decisions and, second, to propose six initiatives for a

bold Commission. Everything proceeds from the view that the

Commission under section 5 of the Federal Trade Commission Act

should enjoin conduct that is likely to displace the process of

competition on the merits without legitimate business justification.

KEY WORDS:Unfair competition, Federal Trade Commission, FTC § 5,

competition policy.

THE ANTITRUST BULLETIN:Vol. 56, No. 4/Winter 2011 :823

* Professor of Law and Director, IProgress Project, New York Law

School.

AUTHOR’S NOTE: This article develops and reconfigures analysis and proposals

from draft notes posted as Toward an Expansive FTC § 5: Beyond the Sherman

Act and an Ex Post Model of Enforcement, available at http://ssrn.com/author

=75649. The notes were used in a presentation given at the American Antitrust

© 2011 by Federal Legal Publications, Inc.

I. INTRODUCTION: ANTITRUST, JOHN FLYNN,

AND THE CONCEPT OF COMPETITIVE PROCESS

John Flynn wrote about antitrust the way he did about other topics—

as both a fine scholar committed to analytical rigor and a public intel-

lectual concerned with the commonweal. In this view, antitrust policy

rightly concerns not only competition and cooperation but liberty and

equality, not only relations between market participants but between

commercial firms and political institutions, and ultimately between

commerce and civic virtue. At this crowded intersection, the effi-

ciency norm is important but insufficient on two counts. First, effi-

ciency is a vagrant term whose normative monopoly cannot deliver

the doctrinal clarity or coherence promised by its acolytes. Second,

good competition policy must also take into account the “social and

political values of a just community, the integrity of individualism in

that community, and the ideal of equality of economic opportunity.”1

Although John’s rhetoric is currently out of favor, value pluralism

remains a part of our political economy if not a part of current

antitrust discourse. We need not be reminded that economics is not a

value-neutral domain devoid of social and political values, whether

in theory or in practice. Antitrust examples include not only the 1960s

era of progressive formalism but more recently an ideology of laissez

faire capitalism—whether Justice Antonin Scalia’s extravagant refer-

ence in his Trinko opinion to the old Colgate case to support a monop-

824 :THE ANTITRUST BULLETIN:Vol. 56, No. 4/Winter 2011

Institute annual conference, held at the National Press Club, June 18, 2009. This

article also expands on the last section of The Fate of Monopolization, 2009 MER-

CATO, CONCORRENZA, REGOLE 469 (paper presented at conference celebrating MCR

decennial, Fondazione Eni Enrico Mattei, Milano, Italia, June 30, 2009).

1John J. Flynn, Antitrust Policy and the Concept of a Competitive Process,

35 N.Y.L. SCH. L. REV. 893, 897 (1990) (symposium celebrating Sherman Act

centennial). It should be noted that John recognized Eleanor Fox’s thoughtful

historical research as opening the door to viewing antitrust in terms of com-

petitive process. Eleanor M. Fox, The Modernization of Antitrust: A New Equilib-

rium, 66 CORNELL L. REV. 1140 (1981). Cf. LAWRENCE SULLIVAN, ANTITRUST

(1977). For an expansive treatment of competition policy as a pluralist

domain, see RUDOLPH J.R. PERITZ, COMPETITION POLICY IN AMERICA: HISTORY,

RHETORIC, LAW (rev. ed. 2001) (developing theme that the rhetoric of free com-

petition has reflected struggles to mediate between normative commitments

to liberty and equality).

olist’s unrestrained freedom of contract, or the Court’s presumption

that predatory pricing is economically irrational, a presumption based

on an oversimplification of contestable markets that neglects the the-

ory’s conditions of possibility as well as the mainstream economics of

strategic conduct.

John sought to capture a modest form of value pluralism in the

concept of a “competitive process” and, on occasion, competition as

“the rule of trade.” The appropriate question then is whether “con-

duct has been used to displace the competitive process without justifi-

cation or excuse.”2In its strictest sense, this is a question of incipiency,

one that should not wait for the consequences of competition’s dis-

placement. The public benefits of early intervention, whether nar-

rowly economic or more widely defined, are akin to arresting assault

before it ripens into battery. John called for a pragmatic procedural

approach founded in inductive analysis and structured by presump-

tions and shifting burdens of proof, not unlike the structured rule of

reason later advanced in Justice Steven Breyer’s opinion in California

Dental3or Judge Douglas Ginsburg’s useful elaboration in Polygram.4

It is not entirely irrelevant that both Justice Breyer’s and Judge Gins-

burg’s opinions were written in cases based on section 5 of the Federal

Trade Commission Act5(FTC § 5). The first the Federal Trade Commis-

sion (Commission) lost because, according to Justice David Souter’s

opinion for the Court, it did not engage in “an enquiry meet for the

case,” and the second it won after adequate inquiry. In both cases, FTC §

5 was relevant only because it gave the Commission statutory authority;

it was irrelevant insofar as the complaints alleged that the defendants

engaged in conduct prohibited directly under section 1 of the Sherman

Act6and only transitively under FTC § 5. This has been the Commis-

sion’s standard court practice since the 1980s, after three notorious

UNFAIR COMPETITION UNDER § 5 : 825

2John J. Flynn, Antitrust Policy, Innovation Efficiencies, and the Suppres-

sion of Technology, 66 ANTITRUSTL.J. 487, 489 (1998).

3Cal. Dental Ass’n v. FTC, 526 U.S. 756 (1999).

4Polygram Holding, Inc. v. FTC, 416 F.3d 29, 36–37 (D.C. Cir. 2005).

5FTC Act § 5, 15 U.S.C. § 45 (2011).

6Sherman Act, 15 U.S.C. §1 (2011).