Franchisors should be aware of the “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” that was issued in August, representing the first formal policy statement regarding the FTC’s standalone authority under the “[u]nfair methods of competition” prong of Section 5 of the FTC Act.  Time will tell whether the policy statement merely reflects broadly accepted principles or whether it portends of an increased use of standalone Section 5 authority by the FTC.

ThinkstockPhotos-476176878Most in the franchise industry are aware that Section 5 of the FTC Act declares unlawful “unfair or deceptive acts or practices in or affecting commerce.”  15 U.S.C. §45(a)(1). Indeed, a violation of the Franchise Rule also constitutes a violation of Section 5(a)(1) of the FTC Act.  15 U.S.C. §57a(d)(3). More than 30 years ago, the FTC issued policy statements regarding the concepts of unfairness and deception under Section 5 of the FTC Act.  See Fed. Trade Comm’n, Commission Statement of Policy on Scope of the Consumer Unfairness Jurisdiction, 104 F.T.C. 1070, 1071 (1984) (appended to In re Int’l Harvester Co., 104 F.T.C. 949 (1984)); Fed. Trade Comm’n, Policy Statement on Deception (appended to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 174 (1984)). Those policy statements set forth a detailed analysis of the concepts addressed.

Section 5 of the FTC Act also prohibits “[u]nfair methods of competition in or affecting commerce.” This phrase has been generally understood to reach conduct beyond conduct that violates the Sherman Act or the Clayton Act. However, the question has been—how much broader is the FTC’s authority under Section 5? With a dearth of cases over the past five decades interpreting this aspect of Section 5, and with an expanding use of Section 5 by the FTC in recent years, an increased interest in guidelines regarding the FTC’s application of Section 5 arose, including among some of the Commissioners themselves. For example, Commissioner Joshua Wright proposed a policy statement in 2013 that was not adopted.

Two years later, during the summer doldrums, the Commission issued its “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” (“Policy Statement”)  which was approved by a 4-1 vote. Unlike the detailed policy statements on the concepts of unfairness and deception, this Policy Statement is less than one page and boils down to three points, to which the FTC states it “adheres” in deciding whether to challenge conduct as an unfair method of competition in violation of Section 5:

  • the Commission will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare;
  • the act or practice will be evaluated under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and
  • the Commission is less likely to challenge an act or practice as an unfair method of competition on a standalone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.

The FTC’s accompanying two-page “Statement of the Federal Trade Commission On the Issuance of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act” (“Accompanying Statement”)  provides minimal elaboration. The Accompanying Statement states that the FTC, in exercising its “standalone” Section 5 authority, “will rely on the accumulated knowledge and experience embedded within the ‘rule of reason’ framework developed under the antitrust laws over the past 125 years.” The Statement also confirms that the FTC will continue to rely upon the Sherman and Clayton Acts as its primary enforcement tools.

The “Dissenting Statement of Commissioner Maureen K. Ohlhausen” (“Dissenting Statement“) recognizes the value of the FTC providing guidance on the scope of Section 5. However, the Dissenting Statement criticizes the Policy Statement adopted by the FTC as being “too abbreviated in substance and process.” It further expresses the view that “what substance the statement does offer ultimately provides more questions than answers, undermining its value as guidance.” Finally, the Dissenting Statement laments that the Policy Statement “is almost certain to encourage more frequent exploration of this authority in conduct and merger investigations and standalone Section 5 enforcement by the Commission.”

Historically, the FTC has not pursued a large number of actions asserting violations by franchisors of the Franchise Rule or the “unfair or deceptive acts or practices” provision of Section 5.  See U.S. Gen. Accounting Off., GAO-01-776, Federal Trade Commission: Enforcement of the Franchise Rule 16, Table 3 (2001) (between 1993 and 2000, FTC filed six cases against franchisors asserting violations of the Franchise Rule only, no cases asserting a violation of Section 5 of the FTC Act only, and 14 cases asserting violations of both).  Similarly, “standalone” Section 5 authority over “unfair methods of competition” has seldom been used to challenge practices of franchisors that franchisees, or others, may contend also violate the antitrust laws. Time, and application of the Policy Statement, will reveal whether the Policy Statement is essentially a statement of the existing application of Section 5 and “principles . . . on which there is broad consensus,” as indicated in the Accompanying Statement, or whether the Dissenting Statement is justified in its fears that the Policy Statement will turn out to be a wolf in sheep’s clothing that “will ultimately lead to more, not less, uncertainty and burdens for the business community,” including the franchise industry.