Questions Surround Federal Trade Commission’s Authority to Issue Non-Compete Clause Rule

April 19, 2023

Texas District Court Preliminarily Enjoins FTC’s Non-Compete Rule Only for Named Plaintiffs (July 9, 2024)
FTC Issues Final Rule Banning Most Non-Compete Agreements (April 24, 2024)

With the public comment period coming to a close, business groups and others have made statements and submitted public comments criticizing the Federal Trade Commission’s (FTC’s) proposed rule to ban non-compete clauses as an almost unprecedented use of its rulemaking authority.

The FTC voted 3 to 1 to issue the proposed rule for public comment, with the comment period closing April 19, 2023. Commissioner Christine Wilson — who has since resigned from the FTC — predicted in her dissent from the rulemaking that “numerous, and meritorious, legal challenges … undoubtedly will be launched against the Non-Compete Clause Rule.”

The public comment period has provided more information on what those challenges may look like. For example, the U.S. Chamber of Commerce submitted a lengthy comment explaining why “[t]he Chamber and its membership are strongly opposed to the Proposed Rule,” and in previous public statements the Chamber labeled the FTC’s actions as “blatantly unlawful” and promised that it will “go to court if necessary to stop the legally baseless ban on noncompete clauses.”

While the FTC will now review the public comments, it has shown every indication that it will proceed to finalize the proposed rule, either in its current form or with some changes. Legal challenges raising serious questions about the FTC’s statutory and constitutional authority to issue the proposed rule are likely to follow. These challenges are likely to be heavily litigated, perhaps all the way to the U.S. Supreme Court.

The FTC’s Asserted Authority to Issue the Proposed Rule

The FTC stated in its notice of proposed rulemaking that it has authority to issue the non-compete clause rule pursuant to Sections 5 and 6(g) of the Federal Trade Commission Act. Section 5 declares “[u]nfair methods of competition” unlawful. Section 6(g) grants the FTC authority “to make rules and regulations for the purpose of carrying out the provisions of” the subchapter of the U.S. Code concerning the FTC. Both in academic work and in defense of the proposed rule, the Commissioners who voted in favor of the notice of proposed rulemaking have asserted that Sections 5 and 6(g) work together to give the FTC authority to issue rules concerning “unfair methods of competition.”

These Commissioners point to a 1973 opinion from the U.S. Circuit Court of Appeals for the D.C. Circuit in National Petroleum Refiners Ass’n v. FTC as support for their position. That case concerned whether Section 6(g) granted the FTC authority to promulgate a rule establishing that a gas station’s failure to post octane rating numbers on gas pumps constituted an unfair method of competition and an unfair or deceptive act or practice. The D.C. Circuit held that the FTC had authority under Section 6(g) to promulgate rules interpreting the FTC Act, including Section 5’s prohibition on “unfair methods of competition.”

Arguments Against the FTC’s Authority to Issue the Proposed Rule

The rule’s detractors are likely to raise several arguments challenging the FTC’s authority to issue the proposed rule. These arguments are grounded in the FTC’s rulemaking history, amendments to the FTC Act, administrative law and constitutional law.

Statutory Arguments Against the Proposed Rule

Challengers likely will argue that Section 6(g) does not provide the FTC with the statutory authority to issue the proposed rule.

Although Section 6(g) was initially enacted in 1914, the FTC did not promulgate any substantive rules under that provision until 1962. During this period, multiple Commissioners expressly stated that the FTC did not have binding rulemaking authority, except to issue procedural rules governing its internal procedures. Moreover, as former Commissioner Wilson has noted, even when the FTC began asserting rulemaking authority under Section 6(g) in the 1960s and 1970s, it did so largely to define unfair and deceptive acts or practices, not unfair methods of competition. In fact, the FTC promulgated only one substantive rule grounded solely in the agency’s authority to regulate unfair methods of competition. And even that rule — issued in 1968 — was never enforced and was subsequently withdrawn. The non-compete clause rule’s challengers are likely to point to the FTC’s reluctance to engage in rulemaking related to unfair methods of competition as evidence that Section 6(g) never granted it such authority.

Recent Supreme Court decisions have expressed skepticism when an agency “claim[s] to discover in a long-extant statute an unheralded power,” and found it “telling” when an agency had never before asserted its regulatory authority to issue regulations in a particular area. Challengers likely will argue that these principles should apply equally to the FTC’s assertion of authority here.

Detractors of the proposed rule are also likely to point to the fact that Congress amended the FTC Act in 1975 through the Magnuson-Moss Warranty Act, and in doing so, granted the FTC consumer protection rulemaking authority, but was silent on competition rulemaking authority. The Magnuson-Moss Warranty Act was a specific response to the FTC’s consumer protection rulemaking “bender” in the 1960s and 1970s. Challengers of the non-compete clause rule likely will argue that this amendment was Congress’ first and only grant of substantive rulemaking authority to the FTC — and thus Congress’ decision not to grant the FTC authority in Magnuson-Moss to promulgate substantive competition rules means that the FTC lacks that authority.

Additionally, challengers are likely to note that the current Supreme Court “‘typically greet[s]’ assertions of ‘extravagant statutory power over the national economy’ with ‘skepticism.’” The “major questions doctrine” brought to life under the current Supreme Court requires “clear congressional authorization” before interpreting a statute to grant an agency such significant authority. The challengers likely will argue that the significance of the proposed rule implicates the major questions doctrine, putting these issues squarely before the courts.

Constitutional Arguments Against the Proposed Rule

The challengers are also likely to advance constitutional challenges to the FTC’s authority to issue the proposed rule, even if the FTC Act could be read to do so. In particular, the challengers are likely to invoke the nondelegation doctrine, arguing that it would represent an unconstitutional delegation of legislative authority to grant the FTC rulemaking authority to define “unfair methods of competition.”

Striking down the proposed rule on nondelegation doctrine grounds would represent a watershed moment in constitutional and administrative law. In 1935, the Supreme Court in A.L.A. Schechter Poultry Corp. v. United States held that a statute that delegated authority to the president to approve “codes of fair competition” was unconstitutional under what is now called the nondelegation doctrine. But the Supreme Court has not found another grant of rulemaking authority to violate the doctrine since Schecter Poultry.

Nevertheless, there are reasons to think that the Supreme Court may seriously consider a nondelegation challenge here, if the Justices ultimately hear a challenge to the proposed rule. As former Commissioner Phillips has noted, the standard for the purported delegation identified by the FTC — a delegation to make rules concerning “unfair methods of competition” — is no more specific than (and, indeed, is quite similar to) the purported delegation that the Supreme Court disapproved of in Schecter Poultry — a delegation to approve “codes of fair competition.” Several members of the current Supreme Court have expressed interest in reviving the nondelegation doctrine, and a challenge to the proposed rule may provide the opportunity to do so.

The public comments demonstrate that it is highly likely that any final rule related to non-compete clauses will be challenged and that challengers will raise statutory and constitutional questions about the rule and the FTC’s ability to issue it. It is difficult to predict how (or on what grounds) the judicial branch will resolve these questions. At the very least, litigation may delay the FTC’s enforcement of the proposed rule as the challenges make their way through the courts. For questions concerning the FTC’s proposed rule and the litigation that is likely to follow it, please contact the firm’s administrative law, antitrust, appellate, and labor and employment lawyers.