Federal Trade Commissioner Joshua Wright recently proposed a new legal standard to evaluate "unfair methods of competition" under Section 5 of the Federal Trade Commission ("FTC") Act, 15 U.S.C. § 45(a) (2012). The FTC must prove that the act or practice (1) harms or is likely to harm competition, significantly and (2) lacks cognizable efficiencies. The FTC currently prosecutes both traditional antitrust offenses and other conduct under Section 5's unfair methods of competition clause. Under Wright's proposal, the FTC would still apply the well-forged antitrust case law to orthodox Sherman and Clayton Act violations, but use his proposed standard for any remaining standalone violations of Section 5. Wright proposes that his standard be applied only to unfair methods of conduct, for which no "wellâ€forged case law under the traditional federal antitrust laws exists." Where that boundary lies, as this Essay discusses, is a far more difficult question.
First, I agree with Wright that it is often difficult for courts and agencies to ramble through the wilds of economic theory to identify the conduct's net competitive consequences. The Supreme Court once recognized its shortcomings in making such trade-offs. More recently the dissent in Leegin and Actavis criticized the rule of reason. Indeed, Congress's dissatisfaction with the Court's rule of reason motivated Section 5.
Second, I welcome Wright's efforts to bring competition law closer to the rule of law. The Court of late has "repeatedly emphasized the importance of clear rules in antitrust law." A key component of the rule of law is that the courts and enforcement authorities should apply clear objective legal prohibitions to particular facts with sufficient transparency, uniformity, and predictability so that private actors can reasonably anticipate what actions would be prosecuted and fashion their behavior accordingly.
Consequently, we can agree that any legal standard of "unfair methods of competition" under Section 5 should promote (i) accuracy; (ii) administrability-the standard should be easy to apply; (iii) consistency-the standard should yield predictable results; (iv) objectivity-the standard should leave little, if any, subjective input from the decision makers; (v) applicability-the standard should reach as wide a scope of conduct as possible; and (vi) transparency-the standard and its objectives should be understandable.
Although Wright's proposal seeks to bring Section 5 closer to these rule-of-law principles, it is wide of the mark. Wright relies on the Second Circuit's analysis in Ethyl. Whatever one's qualms about this dated decision, it is a good starting point. Ideally any proposed legal standard for "unfair methods of competition" under Section 5 would have broad applicability. The standard would prohibit the current orthodox violations under the Sherman and Clayton Acts, and would reach further, as Congress intended, to condemn other unfair methods of competition beyond these Acts' reach.
So, at a minimum, whatever is currently illegal under the Sherman and Clayton Acts would remain illegal under the Section 5 legal standard; but not everything illegal under the Section 5 standard would necessarily violate the Sherman and Clayton Acts. The legal standard, pursuant to Section 5's design, should "supplement and bolster the Sherman Act and the Clayton Act . . . to stop in their incipiency acts and practices which, when full blown, would violate those Acts."
One concern, which Part II addresses, is that Wright's proposed legal standard does not go as far as Congress intended. Part III addresses a second concern, namely the risk that the proposed legal standard goes the other direction and permits conduct that is otherwise illegal under the Sherman and Clayton Acts. As Wright recognizes, "prosecuting conduct under disparate standards may blur the line between lawful and unlawful behavior." Here, I believe, the proposed standard can cause much mischief.