FTC’s First Open Meeting Highlights Aggressive Enforcement Priorities and Partisan Divide

FTC’s First Open Meeting Highlights Aggressive Enforcement Priorities and Partisan Divide

Blog WilmerHale Privacy and Cybersecurity Law

On Thursday, July 1, the Federal Trade Commission held its first meeting under Chair Lina M. Khan and first open business meeting in over twenty years. The Commission considered four items during the nearly two hour long meeting: the Made in U.S.A. Labeling Rule, changes to the FTC’s rules of practice, rescinding the 2015 “Statement of Antitrust Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act,” and compulsory process resolutions.

The meeting provides tremendous insight into what Chair Kahn’s FTC will look like and what its priorities will be. Key takeaways include:

  • The new FTC majority appears more willing to adopt measures or orders without the support of the Republican Commissioners, which is a change for an agency that has traditionally tried to operate in a collegial manner. Each issue voted on during the meeting passed, with the votes of the three Democrats and without the votes of the two Republican Commissioners.
  • The FTC majority is actively looking for new ways to seek civil monetary penalties in light of the Supreme Court’s decision in AMG Capital Management, which held that the agency could not seek monetary injunctive relief under its Section 13(b) authority. The Made in U.S.A. rule will allow it to collect penalties for first time violations of the rule as well as other damages, and the procedural changes adopted during the meeting may make it easier for the FTC majority to pass sweeping rules that bring with them civil penalty authority.
  • A package of enforcement resolutions will make it easier for FTC staff to open investigations and use compulsory process to obtain discovery from alleged Section 5 violators. Priority areas for enforcement include mergers (both proposed and consummated), entities already under FTC order, healthcare businesses, pharmaceutical companies, and technology companies and digital platforms technology companies.
  • The FTC majority will seek to move quickly to remove what it views as procedural and substantive roadblocks to the FTC’s authority. The recission during the meeting of the 2015 Antitrust Enforcement Principles that had been adopted with bipartisan support shows that the Democratic majority is rethinking the FTC’s approach to competition enforcement under a more populist approach.
  • The FTC majority is serious about using the FTC’s Section 18 rulemaking authority. The procedural changes are designed to streamline proceedings and give the Commission and presiding officer more control over the informal hearing process.
  • The FTC majority is clearly willing to push the bounds of its Section 5 authority, which may receive support in Congress given some lawmakers’ support for Chair Kahn’s expansive view of antitrust laws. At the same time, these efforts could also play a role in pushing a national privacy law forward, as Congress can look at the efforts to expand existing authority as a means of making this authority clearer and more explicit, given the FTC’s recent losses in court.
  • Although the open meeting format was intended by the FTC majority to bring an era of increased transparency to the agency, the agenda items were announced only a week prior to the meeting, the minimum notice period permitted by law, and the public comment period was held after the votes.

Additional details about each of the four items voted on at the meeting follows.

Made in U.S.A. Labeling Rule

The first agenda item for the open meeting was a vote to finalize the Made in U.S.A. Labeling Rule, which passed 3-2, with the Democratic commissioners supporting the measure. That rule prohibits marketers from making unqualified claims that their products are “Made in U.S.A.” unless they can prove that their products are “all or virtually all” made in the United States.

Although the FTC was initially authorized to promulgate a rule relating to Made in U.S.A. fraud in 1994 in connection with the North American Free Trade Agreement, it chose not to begin the rulemaking process until recently, instead enforcing violations under its general Section 5 authority. The Commission’s historical enforcement program was criticized by the Democratic Commissioners during the meeting as being toothless, consisting primarily of compliance monitoring and counseling, with only a few targeted enforcement actions. In only two matters did commission enforcement against Made in U.S.A. violators eventually result in civil monetary penalties for the agency.

The final rule as approved by the Commission at the meeting prohibits marketers from including unqualified Made in U.S.A. claims on labels unless: (1) final assembly or processing of the product occurs in the United States; (2) all significant processing that goes into the product occurs in the United States; and (3) all or virtually all ingredients or components of the product are made and sourced in the United States.

The three Democratic Commissioners characterized the final rule as a “restatement rule,” one that does not impose new obligations on businesses but merely restates established guidance and legal precedent. However, by promulgating the rule, the FTC has given itself the ability to seek civil penalties of up to $43,280 per violation in addition to damages, penalties, and other relief. This is important in light of the Supreme Court’s recent decision in AMG Capital Management, which eliminated the FTC’s ability to seek equitable monetary relief under Section 13(b) of the FTC Act. As a result of that decision, the Commission has been looking for ways to obtain monetary relief for consumers, which it will now be able to do where more than a de minimis amount of a product is of foreign origin, but a business is claiming without qualification that it is made in the U.S.A.

The FTC also used this as an opportunity to extend the rule beyond tangible products to which a label could be affixed. The final rule covers not just labels, but also advertising materials that are disseminated in print or by electronic means, which means it could cover claims in print catalogs and online marketing materials. This was criticized by both Republican Commissioners during the meeting as exceeding the statutory authority granted by Congress in 1994, and Commissioner Wilson expressed concern that this type of regulatory overreach could also result in Congressional action to curb the FTC’s authority, as when Congress hampered the ability of the agency to promulgate new rules in the early 1980s.

Revisions to the FTC’s Rules of Practice

The Democratic Commissioners also voted to amend the FTC’s rules of practice (16 C.F.R. Parts 0 and 1) relating to the agency’s organizational structure and authority, as well as for rulemaking under Section 18 of the FTC Act, which allows it to promulgate rules related to unfair or deceptive trade practices (Section 18 does not provide for the promulgation of rules relating to unfair methods of competition). Although most federal agencies follow notice and comment rulemaking under the Administrative Procedure Act (“APA”), the FTC has special procedures that it must follow under the Magnuson-Moss Warranty Act—Federal Trade Commission Improvement Act of 1980 to promulgate rules related to unfair or deceptive trade practices. Those procedures, which include an opportunity for an oral hearing and cross-examination, are more burdensome and time consuming than standard APA rulemaking and have resulted in the agency shunning rulemaking under its Section 18 authority since the early 1980s.

This past Spring, then-Acting Chair Slaughter created a new rulemaking group within the agency that was tasked with creating new rules as well as strengthening existing ones across the FTC’s vast consumer protection authority. According to the Democratic Commissioners, the procedural changes adopted at the meeting are designed to streamline the rulemaking process and change the perception of that process as being one that is unduly burdensome. Changes were also made to the rules to reflect the agency’s current enforcement authority and organizational structure.

The changes to Section 18 rulemaking procedures include the following:

  • Designating the Chair to serve as the presiding officer or allowing for an alternative presiding officer for rulemaking proceedings; previously the Chief Administrative Law Judge served this function.
  • Providing for an informal hearing at the request of an interested person in response to the notice of proposed rulemaking or at the Commission’s discretion. The request must be submitted to the Commission prior to the close of the written comment period, and must include a statement identifying the person’s interest in the proceeding as well as any proposals to add disputed issues of material fact beyond those identified in the notice.
  • Substantively expanding on the requirements for the initial and final notices of informal hearings, as well as for requests to conduct cross-examinations or present rebuttal submissions. The amended rule specifies that cross-examinations and rebuttal submissions will only be available to address disputed issues of material fact necessary to be resolved, and that there must be a specific justification supporting the request, which will create a high bar for granting such requests in practice. The Commission also reserves the right to require any group of interested persons with similar interests to select a representative to conduct cross-examinations or make rebuttal submissions on behalf of the group.
  • Providing the presiding officer with powers to conduct effective and orderly informal hearings in rulemaking proceedings, including the power to impose time limits on oral presentations and to select or modify representatives designated to conduct cross-examinations. Other measures to increase efficiency including limiting hearings to a total of five days; eliminating direct examinations; removing procedures to allow the presiding officer to compel the attendance of persons, require the production of documents, or require responses to written questions; eliminating the requirement that Commission staff publish a staff report containing an analysis of the rulemaking record; and recommendations as to the form of the final rule for public comment.
  • Eliminating procedures allowing interested persons to petition the Commission or to appeal rulings of the presiding officer during an informal hearing, and adding a separate post-hearing process for petitions seeking Commission review of any rulings by the presiding officer denying or limiting the petitioner’s ability to conduct cross-examinations or make rebuttal submissions.
  • Increasing transparency into conversations between interested parties and the Commissioners or their staff relating to rulemaking by requiring that any oral communications be placed on the rulemaking record through either a transcript of the communication or a memorandum that summarizes the meeting, including a list of all persons attending and a summary of all data and arguments presented, as well as other amendments clarifying the treatment of written communications to a Commissioner or their staff during the rulemaking proceeding.

Both Commissioners Wilson and Phillips opposed the changes and expressed concern that they could lead to a return to aggressive unbounded rulemaking efforts that could again result in Congress taking measures to curb the FTC’s authority.

Commissioner Wilson further addressed two key issues: objective management of the rulemaking process and procedural limitations impacting public understanding and opportunities for input. The initial role of the presiding officer was to ensure fairness in hearing processes and to make independent recommendations to the Commission, Commissioner Wilson explained. However, in the 1970s, outcomes were perceived as biased by the public leading Congress to impose obligations to ensure the independence of the presiding officer. Commissioner Wilson strongly questioned the reasoning behind removing the Chief Administrative Law Judge as presiding officer, expressing concern about preserving independence of the presiding officer, ensuring fair assessments of evidence and data, and avoiding public perceptions that the FTC intends to politicize the rulemaking process. Additionally, Commissioner Wilson noted that the Commissions rulemaking steps, imposed to help build public trust following the Commission’s several rulemakings in the 1970s, provided for robust public input. The Commissioner urged the Commission to seek guidance from past Commissioners to ensure that the FTC’s approach continues to allow for this public input and avoids unintended consequences of removing the above procedural steps.

These are important procedural changes that have the potential to make the Commission’s rulemaking process more efficient. They may also facilitate the future adoption of new privacy rules (for competition related issues, both Chair Kahn and Commissioner Chopra have suggested that the FTC should engage in notice and comment rulemaking under Section 5, though there is some debate over whether or not the FTC retains that authority). Commissioner Slaughter has been vocal that she believes a comprehensive privacy rule in the absence of federal legislation is necessary, and Commissioner Wilson has indicated support in recent months as well. With fewer procedural rulemaking hurdles and continued inaction in Congress, it is possible that the Commission will consider issuing privacy rules in the near future.

2015 Statement of Antitrust Enforcement Principles

The Commissioners also voted to rescind the 2015 “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” That policy, adopted on a bipartisan basis, described three principles the Commission was to follow when using its Section 5 authority to address anticompetitive practices. First, the Commission would be guided by public policy underlying the antitrust laws, most notably the consumer welfare principle. Second, the Commission would evaluate potentially anticompetitive practices under a standard similar to the “rule of reason;” for the Commission to bring an enforcement action, the practice must cause or be likely to cause harm to competition, taking into account any resulting efficiencies and business justifications. Third, the Commission would be less likely to use its Section 5 authority to challenge a practice if enforcement could be brought under the Sherman or Clayton Acts.

When it adopted the policy in 2015, the Commission’s stated goal was to align its Section 5 authority with the Sherman and Clayton Acts. The Commission justified this interpretation of its Section 5 authority as reflecting “broad consensus” and benefitting from the well-understood rule of reason framework, which developed through caselaw for over 125 years. The rescinded policy was the Commission’s first formal articulation of its Section 5 enforcement priorities concerning unfair methods of competition. Developing a formal policy for Section 5 enforcement actions became a priority for the Commission after it used this authority without relying on antitrust laws in 2008 in In re Negotiated Data Solutions, LLC, No. C-4234 (F.T.C. 2008).

In introducing the resolution to rescind the policy statement, Chair Khan lamented the effect the policy had had on the Commission's willingness to use its Section 5 authority to investigate anticompetitive practices, noting that apart from invitations to collude, the Commission had pled a standalone Section 5 violation only once since the policy’s adoption. Chair Khan signaled that rescinding the policy was the Commission’s first step in expanding its Section 5 authority to address anticompetitive practices, and that the Commission would likely issue further guidance or consider subsequent resolutions in the coming months to clarify what practices constitute “unfair methods of competition.”

Chair Khan justified the rescission of the policy by stating that it improperly tied the Commission’s enforcement authority to the Sherman and Clayton Acts instead of the FTC Act, the Commission’s enabling statute. The text and history of Section 5, she argued, broadly authorizes the Commission to investigate and police conduct not prohibited by the Sherman or Clayton Acts. She further noted that the policy was misguided because, by aligning Section 5 with the Sherman and Clayton Acts, the Commission surrendered its “unique advantages as an expert body with the power to adjudicate cases, issue rules and guidance, and conduct marketplace studies.” Perhaps foreshadowing the Commission’s intent to expand its Section 5 authority to address anticompetitive practices, Chair Khan also remarked that defendants have prevailed in most cases decided under a rule of reason framework in recent decades.

In dissent, Commissioner Phillips condemned the rescission of the policy, stating that by disassociating the Commission’s Section 5 authority from antitrust law, the Majority was disregarding decades of precedent and judicial interpretation. He further noted that by rescinding the policy without replacing it, the Commission was removing clarity and transparency from its enforcement actions, the opposite of its stated goal. Commissioner Wilson, also in dissent, expressed concern that the Commission's decision to deviate from the consumer welfare principle will result in harm to consumers and the elevation of political considerations over reasoned decision-making when bringing antitrust actions. Furthermore, she cautioned that the Commission should not seek to exceed its authority under the FTC Act, referencing high-profile cases in which courts have admonished the Commission for overstepping its authority, including the Supreme Court’s recent decision in AMG Capital Management.

Compulsory Process Resolutions

The final agenda item was a series of resolutions regarding the FTC’s enforcement priorities. As with the other measures considered by the Commission at the meeting, the resolutions—which were introduced as a package and were not publicly available on the FTC’s website at the time of this article’s publication—passed by a vote of 3-2 along party lines. The resolutions adopted by the Commissioners authorize FTC staff to use compulsory process, including civil investigative demands and subpoenas, to initiate investigations into seven key enforcement areas with the approval of only one Commissioner. Generally, FTC staff are required to obtain approval from the full Commission on an investigation-by-investigation basis before using compulsory process in an investigation. The enforcement priorities include companies already under FTC order; healthcare businesses; pharmaceutical companies; technology companies and digital platforms; business practices targeting workers and small business operators; violations of FTC-administered statutes relating to the COVID-19 pandemic; and certain mergers (both pending and already consummated). These resolutions will be effective for ten years unless they are rescinded by the Commission at an earlier time.

The FTC has adopted compulsory process resolutions in the past, though those were far more targeted, relating to specific industries or business practices, and typically not done as an omnibus package. The resolutions approved last week notably increase the agency’s authority to launch comprehensive investigations and to do so quickly. Chair Khan in her statement emphasized the importance of the resolution pertaining to mergers, noting the current “merger boom” and the fewer bureaucratic hurdles the Commission will now face when conducting merger investigations. These resolutions are yet another signal that the Commission will likely prioritize aggressive antitrust enforcement.

Opposing the resolutions, Commissioner Phillips criticized the Majority’s “false equivalence” of these resolutions with previous resolutions increasing staff authority in consumer protection matters. Specifically, he argued that previous resolutions were narrower in scope, that further oversight was required in competition-related matters because of their inherent complexity, and that the resolutions adopted by the Majority overstepped the Commission’s Section 5 authority. He further argued that the resolutions will reduce the Commission’s oversight and accountability. Commissioner Wilson, who similarly criticized the loss of oversight, expressed concern that the Commission was required to vote on the resolutions as a package, saying that she may have supported individual resolutions if they were subject to separate votes and the Commission was afforded more time to review them.

Public Comment

Following the discussion and adoption of resolutions, the meeting concluded with a public comment period for the first time in the FTC’s history. Over thirty members of the public, many of them affiliated with interest groups, addressed the Commission to bring matters to its attention and comment on its work more generally.

Authors

  • Matt P. O'Malley

    Summer Associate

  • Amber R. Mixon

    Summer Associate