Unfair Trade Practices: a Brief History

David M. Newman Staff Attorney

U.S. Federal Trade Commission Resident Advisor

ASEAN

The views expressed are those of the speaker and not necessarily those of the United States Federal Trade Commission, any other agency of the United States government

or ASEAN

Unfair Trade Practices

• How has “unfair” been defined in United States competition law?

• What is the effect of overbroad definition of unfair?

Unfairness Language

• Federal Trade Commission Act: “Unfair methods of competition . . . are hereby declared unlawful.” 15 USC ? 45(a).

• Indonesia Law 5/1999: “. . . which could result in the occurrence of unfair business competition.” Law 5/1999: Articles 4-5, 7-9, 11-14, 16-23, 28

History of United States Competition Statutes

• Sherman Act (1890) forbids – “Every contract, combination . . ., or conspiracy

in restraint of trade . . .” (15 USC ? 1) – Monopolies or attempts to monopolize (15

USC ? 2) • Supreme Court held that Sherman Act forbids

only “unreasonable” restraints of trade. Standard Oil Co. v. United States, 221 U.S. 1, 65-68 (1911).

History of United States Competition Statutes

• Clayton Act (1914) – Makes tying, exclusive dealing, price

discrimination, certain interlocking directorates and certain mergers illegal (15 USC ?? 13, 14, 18, 19)

– Requires showing that effect of challenged conduct “may be to injure competition” (price discrimination) or “may substantially lessen competition (other provisions)

History of United States Competition Statutes

• Federal Trade Commission Act (1914) prohibits “unfair methods of competition.” (15 USC ? 45(a))

• FTC Act created Federal Trade Commission as an expert body to analyze and define “unfair methods of competition.”

History of United States Competition Statutes

• “The committee [considered] whether it would attempt to define the many and variable unfair practices which prevail in commerce and to forbid their continuance or whether it would, by a general declaration condemning unfair practices, leave it to the commission to determine what practices were unfair. It concluded that the latter course would be the better, [because] there were too many unfair practices to define, and after writing 20 of them into the law it would be quite possible to invent others.” Senate Report No. 597, 63d Cong., 2d Sess., 13 (1914)

History of United States Competition Statutes

• "It is impossible to frame definitions which embrace all unfair practices. There is no limit to human inventiveness in this field. Even if all known unfair practices were specifically defined and prohibited, it would be at once necessary to begin over again. If Congress were to adopt the method of definition, it would undertake an endless task." H. R. Conf. Rep. No. 1142, 63d Cong., 2d Sess., 19 (1914).

FTC v. Sperry & Hutchinson

• Supreme Court held that, in defining “unfairness,” Commission could consider “public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.” 405 U.S. 233, 244 (1972).

• Broadest expression of FTC’s authority to define “unfair methods of competition.”

Criticism

• “The legal theory used in S&H to define the unfairness standard is seriously flawed . . . . Supreme Court has given the FTC the power to determine what is unfair without any guidance whatsoever.” – Ernest Gellhorn, “Trading Stamps, S&H, and

the FTC’s Unfairness Doctrine,” 1983 Duke Law Journal 903.

Criticism

• It is difficult enough for business to comply with the letter of antitrust without being required to divine its spirit as determined by the Commission. . . .The Supreme Court's approach to section 5 is worrisome because it could allow the Commission to roam at large, extending at will the frontiers of antitrust. – Milton Handler, “Reforming the Antitrust Laws,” 82

Colum. L. Rev. 1287, 1328 (November 1982)

Modern View of “Unfair Methods of Competition

• [T]he Bureau of Competition today approaches Section 5 enforcement with caution and with clear notions of enforcement boundaries. . . . Enforcement action is appropriate only where there is a principled, rational theory of anticompetitive harm supported by evidence and by sound economic analysis. – Kevin Arquit, “The Boundaries Of Horizontal Restraints:

Communication And Cooperation Among Competitors: Facilitating Practices And Invitations To Collude,” 61 Antitrust L.J. 531 (Winter, 1993); Mr. Arquit was the incumbent Director of the Commission’s Bureau of Competition.

Modern View of “Unfair Methods of Competition

• [T]he Supreme Court has held that the Commission may “define and proscribe an unfair competitive practice, even though the practice does not infringe either the letter or the spirit of the antitrust laws.” Nonetheless, . . . the Commission has held that “while Section 5 may empower [it] to pursue those activities which offend the ‘basic policies’ of the antitrust laws, we do not believe that power should be used to reshape those policies when they have been clearly expressed and circumscribed.” – M. Howard Morse, “Product Market Definition In The

Pharmaceutical Industry,” 71 Antitrust L.J. 633 (2003); Mr. Morse was a former Assistant Director of the Commission’s Bureau of Competition.

Reasons for Limited View of “Unfair Methods of Competition”

• Consistent with limited role of competition agency

• Avoiding conflict with mandates of other agencies and ministries

Hypothetical

• Traditional retail market – Small independent retailers – Long distribution chain: manufacturers and

importers => distributors => sub-distributors => wholesalers => retailers

– Inconsistent inventory, inability to respond to consumer preferences

– Limited capital => minimal services and amenities

Hypothetical

• New entrant – Direct relationship with manufacturers and

importers – Vertically integrated: central warehousing,

computerized checkout – Up-to-date inventory data – Adequate capital => better services, amenities,

and ability to respond to consumers

Hypothetical results

• New entrant takes market share from traditional retailers

• Traditional retailers complain to competition agency – conduct is “unfair” – New entrant’s scale advantages – Traditional retailers lose businesses, costs jobs

Why is broad unfairness argument appealing?

• Laws that favor SMEs • Political pressure • Traditional sense of “fairness”; cultural

values favor local businesses

Why is broad unfairness argument bad competition policy?

• Decreases consumer welfare • Shifts costs from retailers to consumers;

consumers subsidize SMEs • Distorts markets

Other Reasons for Limited View of “Unfair Methods of Competition”

• Creates uncertainty in application of law • Deters investment • Inhibits job creation and product and

service innovation

“Unfair” Trade Practices

• Should be limited to practices that have predictable effects on competition

• Should be measured by impact on consumer welfare

• Should not be designed to protect competitors from innovation or efficiency