What Does the FTC Want to Ban Next?

Late last year, the Federal Trade Commission unilaterally declared that it could use Section 5 of the FTC Act to deem many types of routine business conduct as “unfair methods of competition,” without any showing of harm to consumers or anticompetitive intent.  In criticizing the move, the Chamber explained that the FTC would use this authority to target companies and business practices that do not conform to its progressive policy agenda.

True to form, the FTC followed suit and launched an opening salvo in its war on business through an attempt to ban non-compete clauses in all employment contracts. As a matter of public policy, the FTC’s proposal is bad enough. But what’s worse is that the proposed ban on non-competes is really a Trojan Horse. Within the proposed rule – if allowed to stand – is a radical expansion of the agency’s ability to regulate competition policy. It is, as Chair Khan stated, the means to “shape the distribution of power and opportunity across our economy.”  If the FTC insists on finalizing this rule, the Chamber will challenge it in court. In the meantime, here’s what such an expanded authority could mean for your business.

What’s next?

What other business practices might the FTC declare illegal?  The “Rule-a-Palooza” is well under way.  For instance, the FTC is currently considering a rule to ban another common agreement, exclusive contracts.  One example of an exclusive contract is an agreement under which a manufacturer agrees to provide a retailer with a product on an exclusive basis for a fixed period of time.  Such contracts can ensure the stability of supply lines, guarantee financing, allocate risk, prevent free riding, foster efficiencies of scale, and enhance inter-brand competition.  The Department of Justice, numerous courts and economists, and even the FTC itself have found that “most exclusive dealing contracts are beneficial.”

Based on the FTC’s Section 5 policy statement, the agency may seek to ban many other common agreements and practices.  For example, the agency finds loyalty rebates problematic.  Every company in the country tries to encourage repeat business, many of them through discounts and rebates (think about your local sandwich or pizza shop).  Likewise, the FTC could target price discrimination, when companies charge different prices to different customers based on factors such as the amount of product the customer buys.

The range of potential rulemaking targets is endless.  In its policy statement, the FTC lists “discriminatory refusals to deal” as “unfair” even though the FTC itself has confirmed in the past that a “firm’s refusal to deal with any other person or company is lawful so long as the refusal is not the product of an anticompetitive agreement with other firms or part of a predatory or exclusionary strategy to acquire or maintain a monopoly.”  The FTC also could ban “using technological incompatibilities to negatively impact competition in adjacent markets,” a rule that could stifle innovation and investment in numerous industries.  Similarly, the FTC notes concerns with many other common practices, including tying, bundling (think about cable and internet packages), and acquisitions of “nascent” competitors.

It gets worse

As the FTC proceeds to establish itself as a rule maker to govern competition in the market, the agency would effectively rewrite decades of antitrust jurisprudence and learning. Until now, the antitrust agencies and the courts have evaluated almost all business practices under the “rule of reason,” an analytical framework that examines all the facts to determine whether the practice helps or harms competition.  Under the FTC’s rulemaking approach, however, the agency could issue blanket bans without evaluating the impact on consumers or competition.

The FTC need not show market power, define a market, nor justify its rule under the rule of reason.  A company cannot defend its conduct based on net efficiencies or a cost-benefit analysis.  In particular cases, courts have found that certain practices, such as long exclusive contracts, can violate the antitrust laws and harm consumers, but those cases are rare and require an in-depth review of the facts, such as evaluating whether one the contracting parties has strong market power.  In any event, those rare cases cannot justify a blanket rule because courts, economists, and the agencies themselves have found that these practices usually promote competition.

The Federal Trade Commission is attempting to unilaterally assume the power to regulate the entirety of the U.S. economy without Congressional authorization. For the business community it means that with each passing day the FTC can find their operations deemed ‘unfair’ and possibly illegal cobbling together a simple majority from up to five non-elected bureaucrats in Washington.