'Unfair Methods of Competition': The Legislative Intent Underlying Section 5 of the Federal Trade Commission Act

Abstract

In the debate over the scope of Section 5 of the Federal Trade Commission Act, the Section’s legislative history has been largely neglected. Most commentators seem simply to assume that the Section’s legislative history provides little guidance as to how the FTC should exercise its authority to prohibit as “unfair methods of competition” business practices. This same assumption has led the Supreme Court in at least one case to suggest in dicta that the Commission has broad authority to use Section 5 to prohibit practices that violate the “spirit,” but not the letter, of the antitrust laws without explaining what that means. Inspired by Robert Bork’s seminal article, Legislative Intent and the Policy of the Sherman Act, this WORKING PAPER undertakes a closer examination of the legislative history of Section 5. It shows that while Congress intended Section 5 to reach beyond the Sherman Act to enable the FTC to prohibit anticompetitive practices in their incipiency before they become full-blown Sherman Act violations, it intended that the Commission’s authority to do so would be constrained by three critical governing principles. First, the Commission would have authority only to outlaw exclusionary, not exploitative, practices. Second, the Commission would have authority to prohibit only those practices that were likely to harm competition and hence consumer welfare, and not practices whose only effect was to harm less efficient competitors. Third, the Commission would be required to apply a rule of reason analysis, similar to that used under the Sherman Act, to declare unfair only those method of competition “which shut out competitors who, by reason of their efficiency, might otherwise be able to continue in business and prosper.” This review of the legislative history shows, therefore, that Congress intended Section 5 to be a “consumer welfare prescription,” just as Robert Bork found to be the case for the Sherman Act.