Dec 12, 2022
On December 9th, The Capitol Forum interviewed Lina Khan, Chair of the Federal Trade Commission, on the FTC’s Section 5 authority. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Well. So Chair Khan, welcome to Second Request and thanks so much for doing this today.
CHAIR LINA KHAN: Great to be here.
TEDDY DOWNEY: So the topic for conversation today is the FTC’s Section 5 authority, which deals with unfair methods of competition. In November, the FTC issued a new policy statement on the scope of unfair methods of competition. And could you talk a little bit about why you repealed the prior policy statement and why you put out a new one?
CHAIR LINA KHAN: Yes, happy to. So as you noted, the policy statement we put out recently lays out how we will be interpreting and enforcing Section 5 of the FTC Act. As I’m sure many of you know, Section 5 of the FTC Act prohibits unfair methods of competition. And this is really the heart of the FTC Act and effectively the core mandate that Congress gave us when creating the FTC.
So when Congress was creating the FTC, they were really doing so in response to what they saw as the weaknesses of the Sherman Act. And the debate around creating the FTC really followed the Standard Oil decision where the court had agreed to allow the breakup of Standard Oil, but they had also noted that they would be interpreting the Sherman Act through the rule of reason standard. And Congress was really quite alarmed by the rule of reason approach and generally worried that this approach would give judges too much discretion and that they would really risk having the antitrust laws become unmoored from what Congress really intended.
So the FTC Act, and specifically the FTC itself, were really created to correct for some of those shortcomings. And for the last century, there have been periods where the FTC has in fact enforced standalone Section 5 quite vigorously. Unfortunately, over the last few decades there had been a retreat away from using unfair methods of competition as a standalone authority. That was partly because there were a series of losses in the eighties that, even though the losses happened on quite narrow grounds, came to stand for the proposition that the courts were skeptical of this authority. And so the FTC should not use it.
And then in 2015, the FTC actually put out a policy statement stating that the Section 5 would basically be interpreted through the prism of the rule of reason. So it would effectively be done using the same type of analysis that is done through the Sherman Act, which to my mind is a real abdication of the responsibility and obligation that Congress gave us in Section 5. And so we wanted to put out the statement to really reactivate this core authority that is really the reason for being for the FTC.
TEDDY DOWNEY: And this podcast is about exploring solutions to monopoly problems. And so I’d love to get some examples of unfair methods of competition that you’ll be policing now that otherwise hasn’t been policed in a really long time.
CHAIR LINA KHAN: Yes. So the statement really lays out how we’ll be interpreting unfair methods of competition. It’s really a textual approach that we’re taking. We’re looking at the core text of the statute, which uses the term unfair methods of competition. And so we’re kind of breaking down that inquiry and saying, first of all, is a particular business practice a method of competition? Is it a way that companies are really getting ahead in the market that we would traditionally think about as a method of competition? And then secondly, is it unfair? Is it something distinct from competition on the merits? And the policy statement kind of goes through in greater depth what some of that analysis would look like.
In practice, I think over the years we’ve seen time and time again certain types of business practices that seem to violate the spirit of the antitrust laws and the competition laws, but in practice can be very difficult to reach under the Sherman Act or even maybe the Clayton Act. And so Section 5 of the FTC kind of gives you an opportunity to reach those additional types of business practices.
One of the business practices that has actually achieved greater consensus as being the violation of Section 5 is what are known as invitations to collude. So these are instances in which a company might make an offer to another company that you want to enter into some type of price fixing agreement and make an invitation to a type of price fixing or collusive act. And in instances where there isn’t actually an agreement formed, you wouldn’t really be able to reach that under the Sherman Act because there was no clear agreement. But it’s clear that by the very act of making the invitation, the company was looking to engage in a law violation. And so that’s one clear instance in which the FTC has previously gone after it and said this is a standalone Section 5 violation.
You can also imagine other types of conduct. So instances in which you have parallel exclusionary conduct, where each specific act might not in and of itself violate the antitrust laws, but in parallel, they’re really interacting in ways that are causing aggregate harm. You can also imagine acquisitions or mergers of a potential or nascent competitor that may not hit the standard under the Clayton Act, but in tandem with a whole bunch of other acquisitions, like certain types of roll up strategies, could still constitute unfair methods of competition.
TEDDY DOWNEY: Yeah, when I read through the statement, I looked through some of the examples of potential unfair methods of competition. I’d say two of the areas that seem to be ripe for enforcement are health care. One, because you mentioned loyalty rebates, tying, bundling, exclusive dealing in the statement. And then fraud related to standard setting process or the examination of patent applications. Is it fair to say that health care is an industry where you see some of these problems?
CHAIR LINA KHAN: Certainly, I think health care is definitely an area where we’ve seen so much consolidation across the entire supply chain and what seems to be serious harm stemming from potential abuses of market power. And so health care, as a general matter, is going to continue to be a big area of focus. I think it’s certainly true that especially when you’re looking at some of the IP related conduct, a lot of that we end up seeing in the context of health care.
The FTC this summer filed a lawsuit in the pesticide context. So we sued Syngenta and Corteva, these major manufacturers of pesticides for engaging in a scheme where they were basically paid to block out generics from the market. And so that was an instance where they were engaging in anti-competitive activity that ultimately made farmers overpay for pesticides to the tune of billions of dollars. And that’s something that in the pesticide context we thought was important to go after. It has some parallels to what we’ve seen in the health care context. So I think we’re going to be looking more broadly, but certainly health care can end up being ground zero for a lot of these types of practices.
TEDDY DOWNEY: And you have two-ways of using this authority, rulemaking and law enforcement. Can you talk a little bit about what type of conduct might fit better under a rulemaking process versus law enforcement situation?
CHAIR LINA KHAN: Yeah, it’s a great question. So for rulemaking, we especially think that that type of market wide rule can be most useful when we see particular practices persist. And so instead of going kind casebycase, you really want to create a market wide standard that makes clear, across the board, that the practice is unlawful.
I think we also think about additional factors in addition to that type of prevalence which look at, say, is this a business practice that would be ripe for private antitrust lawsuits? Of course, there’s a robust private right of action in antitrust. But we’ve also seen that the proliferation of things like mandatory arbitration clauses or class action waivers can in practice make it very difficult for private enforcers or private plaintiffs to go after certain types of conduct. So that’s something that we think about in terms of is it useful for us to be acting here?
I think, in addition, areas where the FTC has built an enormous amount of expertise through its enforcement record can also be a good basis for transitioning to rulemaking. So the FTC was very active in going after pay for delay agreements, for example, and gained a lot of expertise in the types of schemes and agreements that these manufacturers are entering into. And that was one area where in the past there had also been consideration of we keep doing all these pay for delay cases, but the practice is still persistent in the market. Would it just make sense to do a market wide rule? And would that, over the long-term, save us a lot of resources rather than just playing Whac-A-Mole with a lot of these practices. So those are some of the types of considerations that we take into account.
TEDDY DOWNEY: I’m an antitrust journalist or a journalist who looks into these antitrust issues and we look into a lot of allegedly unfair conducts. And a lot of times we go to antitrust lawyers and say, hey, we found this out. And they’ll say, oh, well, that is horrible corporate conduct, but that’s not antitrust. And along the same lines, a lot of the time, antitrust enforcers get dinged with not going after, completely solving, a problem in the market. You block a merger, but then some anti-competitive element of the merger still persists. Is part of what you’re doing here interpreting this authority in a way that will allow you to actually solve problems that you see in these markets more comprehensively?
CHAIR LINA KHAN: I think that’s a fair way to put it. I mean, look, the Congress understood that you can only do so much to define on the front end all the concrete ways in which dominant firms and monopolies will abuse their market power. And so one reason why they used the term unfair methods of competition is because they wanted to give the FTC the latitude and flexibility to have that term keep pace with new business practices and new market realities, in as much as we can see instances in which the Sherman Act can sometimes be slow, or how it’s interpreted can sometimes be slow, to catch up with new market realities, be it in the context of digital markets or in the health care context.
Section 5 could give us the opportunity to go after some of those newer types of business practices or newer types of dynamics. Because Section 5 doesn’t have a private right of action, you can imagine a world in which courts might be more comfortable finding liability under Section 5 before they’re comfortable finding of liability under Section 2. And so I think that’s a very real dynamic.
The other issue is that the FTC’s Section 5 authority complements its broader institutional design and its broader set of authority. So the FTC also has 6(b) authority which allows it to conduct market studies. And so you can imagine a world in which the FTC is using its 6(b) authority to really do a deep dive into a particular market or business practice and really become expert in that and then be able to compellingly go to a court and say, hey, we have deep expertise in this market. These are the types of business practices that we can now decisively say are unfair methods of competition. And the court, recognizing that expertise of this administrative agency, could be more likely to have a liability finding under Section 5. So I would say some people in the past, including potentially Bill Kovacic, have described Section 5 as a gap filler where it can kind of create certain play in the joints of the entire antitrust system, to avoid rigidity and having a regime where the law is not able to actually reach the type of abuses of market power that the antitrust laws were supposed to be able to go after, that Section 5 is supposed to help with that.
TEDDY DOWNEY: And the FTC also has authority over unfair and deceptive acts and practices. Obviously, they’re completely different authorities. But is there any similarity? And what’s the similarities and differences between those authorities? And is there any room for cross-pollination for the folks who have looked at unfair and deceptive acts and practices potentially sharing leads or something like that with the unfair methods of competition investigators?
CHAIR LINA KHAN: Yeah, that’s such a great question. And one thing that I’ve long been fascinated by is that the FTC, actually through the mid-century, routinely used to bring cases that had both unfair methods of competition counts, as well as unfair or deceptive practices counts. These authorities were really viewed in an integrated way. And that’s because the FTC recognized that there are certain types of, say, deceptive practices that are hurting consumers, but that are also harming honest businesses.
So initially, when the FTC was created, it actually only had unfair methods of competition authority. And what the FTC started doing was using its unfair methods of competition authority to go after, say, deceptive advertisements. And the FTC would argue that these deceptive advertisements were actually harming honest businesses because it was a creating a system, creating a market, where companies that were fraudulently advertising their products were actually getting an edge over companies that were being honest.
And so the Consumer Protection Authority that allows us to go after these types of fraudulent advertising practices actually followed our using the competition authority to get there. So that’s an area where you see both the consumer protection violation as well as a competition violation.
But you can imagine all sorts of other instances. I think in the digital context, we’ve also seen ways in which consumer protection violations can reinforce or create market power and how market power can also be used to engage in consumer protection violations.
So one thing we’ve seen is instances in which firms will engage in rampant hoovering up of users’ personal data in ways that might turn a blind eye to privacy laws and privacy requirements. And they’ll use that data to get an edge in the market quickly. And so that could be an instance in which you can imagine both a consumer protection violation as well as a competition violation. You can also imagine instances in which firms, once they have acquired dominance in market power, can use that market power to then engage in more invasive data collection that may violate users’ privacy.
And so you can see the interconnection in particular in that digital context, but I think it’s much broader. And the FTC’s history here is really rich in terms of how we might think about these authorities in tandem, and instances in which being able to use both of these authorities might give you opportunity for a greater remedial toolkit and ability to create greater relief.
TEDDY DOWNEY: I’m glad to hear you say that, because sometimes I definitely think there’s a lot of overlap and then some lawyer will yell at me. And so I appreciate that there is a rich history there.
CHAIR LINA KHAN: Yeah, and we’ve been really prioritizing making sure that we’re breaking down the silos at the agency. So we’ll have integrated teams that include both competition attorneys as well as consumer protection attorneys. Or sometimes you might have the same company that’s being investigated by both sides of the house. And so you want to make sure that you’re able to share evidence, share your investigative tools and outcomes to make sure we’re approaching the lawbreaking in a holistic, integrated way.
TEDDY DOWNEY: That makes a lot of sense to me. I mean, obviously, it’s on a completely different scale. But we try to, when we’re investigating companies, a lot of times very large companies with a lot of influence in the market also happen to be the same ones with kind of convoluted, at times, allegedly unfair practices or fraudulent practices. So I think that expertise on both sides can be complementary for sure.
One thing that’s in there that I would like to ask you I don’t know if you can talk about this is how companies misuse the regulatory process. That’s mentioned as an unfair method of competition. And later on, you mentioned sort of fraudulently inputting data in the standard setting or the PTOs examination of patent applications. Are there other examples of misusing the regulatory process that sort of stand out or are types of things that you can say to elaborate on that?
CHAIR LINA KHAN: Yeah, it’s a good question. I mean, those were the examples that were really top of mind and that we thought were most important to get out there. I guess I would say as a general matter, there are all sorts of instances in which government is effectively handing out certain benefits or perks to companies, that the companies are able to use those types of government benefits to gain an edge in a market. And so I think in those types of instances, we want to be very mindful of how that’s being done.
As a more general matter, things like procurement policy, for example, is also shaping competition in the market. And so we want to just be generally mindful that these other regulatory and government tools that are effectively structuring markets and are effectively structuring competition in markets are not being misused in ways to lock out competitors and upstarts.
TEDDY DOWNEY: So you could be lying to a procurement officer or something to kind of make sure that you keep control or setting up some kind of shell operation to mislead the regulator or that the procurement officer and the government, I mean, it’s stuff where you sort of have some kind of plan and some ways to sort of evade the spirit of the policy. That makes sense.
Another thing, and this actually came up recently. So states have unfair methods of competition authority as well, at least some of them. And I was wondering if there’s a possibility for collaboration with states. Or have you seen any interest in states doing more with the authority that they have when it comes to unfair methods of competition or showing interest in what you’re doing related to that?
CHAIR LINA KHAN: Definitely. I mean, I see the states as really critical law enforcement partners for us, both on the competition side, as well as the consumer protection side. The lawsuit that we filed against Syngenta and Corteva included ten state AGs. AGs were also a critical part of the FTC’s lawsuit against Martin Shkreli. So we’ve had really great partnerships with them.
A lot of states have what are known as mini FTC Acts that model the same statutory language, either on the competition side or consumer protection side or both. Some of the states have also explicitly said that their interpretation of their UDAAP or UMC authority will be modeled on the FTC’s interpretation of its unfair, deceptive or unfair methods of competition authority. And so I think there’s a lot of opportunity for us to be working closely. And we were very active in sharing our statement with the state AGs and our very close contact about how we might be together using this authority in a way that really is fully realizing the vision the Congress set up for us, and also fully addressing the most pervasive, harmful market abuses that we see.
TEDDY DOWNEY: And my last question is some people, particularly kind of conservative commentators, have pushed back on the statement. And what they say is that or one of the things, one of their arguments is that, look. The antitrust statutes are much more flexible and expansive than they were initially intended to be. And as a result, that’s obviated the need for Section 5. And I was wondering if what your response is to that and how you think about the legal justification. I know you talked about it a little bit, but I’m curious to get your response to that in particular.
CHAIR LINA KHAN: Yeah. Look, as a law enforcer, my job is to follow the instructions that Congress has given us in our statute. And that means following the text of the statute. And the fact that the FTC Act says unfair methods of competition, which is distinct from the language of the Sherman Act or the Clayton Act, that’s not a distinction that we can just choose to ignore and walk away from our legal obligation to enforce that.
If 100 plus years on, Congress decides, hey, the Sherman Act is doing pretty well, we don’t need this additional authority and chooses to scale it back or undo it, that’s up to the policymakers. But we as enforcers can’t just unilaterally disarm and decide this authority makes us uncomfortable. We’re not really sure what unfair fully means. This is a job that Congress gave us and that we have to take seriously.
I think in practice, we’ve also seen ways in which Sherman Act enforcement itself can actually create a whole bunch of potential uncertainty and administrability problems that people impute to the FTC Act, but turn a blind eye to in the context of the Sherman Act, right? I mean, the rule of reason framework is not necessarily a model for clarity and administer ability and predictability. And so I think there can also be some selectivity in how some of those criticisms are deployed.
TEDDY DOWNEY: Yeah. Also, it seems like it’s been narrowed a lot. I mean, the law in many respects, at least in the work that we do, a lot of times we’ll write an article and the consensus among lawyers in the antitrust community will be, well, that particular aspect of antitrust law has been very much narrowed over time in the courts. So this idea that somehow it’s become very flexible, expansive and powerful doesn’t really hit home for me, having done this for 15 years.
CHAIR LINA KHAN: Yeah, that’s a really important point, Teddy. There’s been a wholesale retreat and a shrinking of the types of business practices that are viewed as unlawful under the Sherman Act. So I think that’s a really important point to drive home too.
TEDDY DOWNEY: Yeah. Well, this has been super interesting. I’ve read this policy statement so many times because I think it’s really interesting and I think it’s a big, big change. And there is a lot of conduct that I think is now sort of at risk of being enforced against that wasn’t before. So I think it’s going to be a really interesting time. And thank you so much for sitting down with us today and talking about it.
CHAIR LINA KHAN: Thanks so much for having me.
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