How the FTC Investigates Unfair Competition

How the FTC Investigates Unfair Competition

The Federal Trade Commission, or FTC, is the main federal agency that investigates unfair competition practices in the United States. The FTC’s primary tool for this is Section 5 of the FTC Act, which prohibits “unfair methods of competition” and “unfair or deceptive acts or practices.”

When a company engages in anticompetitive practices that harm competitors or consumers, the FTC can open an investigation and take enforcement action. This article provides an overview of how the FTC conducts investigations into unfair competition and enforces the law.

FTC’s Authority to Investigate Unfair Competition

The FTC has broad investigative powers granted by the FTC Act. If the FTC has reason to believe a company is violating antitrust laws or engaging in unfair competition, it can issue subpoenas to obtain documents and testimony related to the suspected violations^[1]. The FTC can also conduct searches and seizures of property and assets used in antitrust violations under court order^[2].

If a company refuses to comply with an FTC subpoena or court order, the FTC can seek civil or criminal contempt charges. So companies have strong incentives to comply with FTC investigations, even if they disagree with the basis for the investigation.

Typical Stages of an FTC Investigation

An FTC investigation into potential unfair competition usually involves three main stages:

1. Initial inquiry and fact-finding
2. Issuing subpoenas and taking testimony
3. Seeking a remedy through litigation or settlement

First, the FTC conducts an initial inquiry into complaints or other sources suggesting unfair competition. The FTC has an Office of Policy Planning that monitors business practices and identifies potential antitrust issues. If the initial inquiry yields enough evidence, the FTC opens an official investigation.

Next, the FTC uses its subpoena power to obtain relevant information. FTC attorneys take sworn testimony from company executives and employees. The FTC analyzes documents, data, and testimony to determine if unfair competition occurred.

Finally, if the FTC believes a violation occurred, it has several options to seek a remedy:

• File an administrative complaint before an FTC administrative law judge
• File a lawsuit in federal court
• Seek a consent order settling the charges without litigation

Most FTC antitrust cases end in consent orders, which avoid litigation but require the company to cease illegal practices. If litigation occurs, the FTC must prove its case before an administrative law judge or federal judge.

What Practices Constitute Unfair Competition?

The FTC Act prohibits “unfair methods of competition.” This gives the FTC flexibility to challenge new forms of anticompetitive conduct that violate the spirit of antitrust laws. Specific unfair competition practices investigated by the FTC include^[3]:

• Price-fixing agreements between competitors
• Bid-rigging schemes
• Monopolization through exclusionary or predatory acts
• Mergers and acquisitions that may substantially lessen competition
• Deceptive advertising or products that harm competitors

Price-fixing and bid-rigging between competitors are clear antitrust violations. The FTC also devotes many resources to reviewing mergers and acquisitions. Under the Clayton Act, deals that would substantially lessen competition or tend to create a monopoly are prohibited.

Monopolization and deceptive practices are trickier areas. Having a monopoly itself is not illegal, but using exclusionary practices to gain or protect a monopoly can violate antitrust laws. And deceptive advertising is prohibited if it sufficiently harms competitors, even if consumers themselves are not deceived.

Proving Unfair Competition in FTC Cases

In litigation, the FTC bears the burden of proving that the challenged practices constitute unfair competition. The FTC must show three elements^[4]:

1. The practice harms or is likely to harm competition
2. The practice is oppressive or unscrupulous
3. Any justifications offered are outweighed by the harm to competition

The first element requires defining the relevant market and showing the company’s market power. Economic analysis plays a key role in assessing impacts on competition.

Whether a practice is oppressive or unscrupulous depends on the nature of the conduct and the market context. Deceiving consumers could be unscrupulous, for example.

Lastly, procompetitive justifications like lower costs or improved products may outweigh modest harms from the practice. The FTC weighs procompetitive effects against anticompetitive harms.

Remedies and Penalties in Unfair Competition Cases

When the FTC prevails in an administrative or federal court action, several remedies are available. Most cases end in consent orders, which may include^[5]:

• Ceasing the unlawful practices
• Corrective advertising or notices to consumers
• Divestitures or licensing to eliminate anticompetitive overlaps
• Compliance monitoring and reporting requirements

The FTC Act authorizes civil penalties up to $43,280 per violation for knowing antitrust violations. Willful violations may also be criminally prosecuted by the Department of Justice, with fines up to $100 million for companies and $1 million for individuals, plus up to 10 years imprisonment.

Criticisms and Challenges Facing the FTC

Despite its broad authority, the FTC faces criticism and challenges in fulfilling its mandate to enforce unfair competition laws, including:

• Lengthy investigations and litigation
• Narrow approach to Section 5 of the FTC Act under past leadership
• Underfunding relative to the DOJ’s Antitrust Division
• Political and industry pressure to limit enforcement

The FTC needs to conduct thorough investigations, but cases typically take years to conclude. Former FTC leadership narrowed the use of Section 5, weakening the FTC’s ability to challenge unfair practices not prohibited by other antitrust laws. The FTC also has fewer resources than DOJ antitrust enforcers. Lastly, well-funded industry lobbying discourages aggressive FTC enforcement.

Conclusion

The FTC serves a vital role in protecting free and fair competition through its investigations and enforcement actions against unfair competition. But the agency faces challenges in fulfilling its mission. With strong leadership and support, the FTC can effectively enforce the antitrust laws using its authority under Section 5 of the FTC Act.

Robust FTC investigation and enforcement benefits consumers and the economy by promoting competitive markets. However, companies engaging in anticompetitive practices should understand the serious consequences they may face from an FTC investigation.

References

[1] A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority

[2] FTC Restores Rigorous Enforcement of Law Banning Unfair Methods of Competition

[3] What the FTC Does

[4] FTC Policy Statement on Unfairness

[5] Federal Trade Commission Act