Jonathan Masur and Eric Posner argue that the Federal Trade Commissions’ recent ban on noncompete clauses is lawful under the plain language of the Federal Trade Commission Act, longstanding court precedent, and well-established administrative law principles.
Many commentators think that the Federal Trade Commission’s rule banning noncompetes is illegal, though they have difficulty agreeing why, or even articulating why. The mostly unarticulated assumption seems to be that the Supreme Court or conservative lower courts will simply not allow the FTC to regulate and will gin up some rationalization in due course. As one commentator put it, “my rationale is that any agency rulemaking that’s a big enough deal to make the front page of the New York Times is likely going to be invalidated by the courts.” We can’t read the minds of the judges. But a reminder of some familiar principles of administrative law does not seem out of place.
The FTC is an administrative agency, and for the time being at least, it is settled law in the United States that Congress can give agencies the authority to make policy by issuing regulations, and that Courts should defer to those policy judgments as long as procedural requirements are satisfied and the judgments themselves are not arbitrary. Thousands of rules, from pollution regulations issued by the Environmental Protection Agency to corporate disclosure requirements imposed by the Securities and Exchange Commission, rest on this legal foundation. Not even the current right-leaning Supreme Court majority shows an inclination to abolish our system of administrative regulation, even if it routinely trims it along the edges.
The FTC’s statutory authority to issue the noncompete rule is not an edge case. Section 5 of the FTC Act of 1914 authorizes the FTC to prevent firms from engaging in “unfair methods of competition.” Congress used this phrase, which was novel at the time and deliberately broad, to encompass anticompetitive behavior that was both already covered by the antitrust laws (which prohibited firms from using “restraints of trade” and from “monopoliz[ing]” markets) as then interpreted by the courts and that reached beyond them. Like countless other regulatory agencies before and since, the FTC was entrusted with authority to interpret the law, effectively to make policy within the law’s ambit. As a noncompete is just a restraint of trade that restricts competition, the statute plainly authorizes the FTC to issue a rule regulating noncompetes.
It is true that the FTC has historically used case-by-case adjudication more than rulemaking to make policy. But Congress also gave the FTC the authority to “make rules and regulations for the purpose of carrying out the provisions of” the Act in section 6(g). Language of this type—“make rules and regulations”—appears dozens of times within the federal code and has been used by agencies of all stripes to issue binding regulations, a practice blessed over and over by the courts. One commentator has suggested that the FTC’s rulemaking authority only permits it to make “interpretive” rules or general statements of policy that do not legally bind private parties. But that reading is belied by the plain text of section 6(g), which contains no such limitation.
A separate section of the Act makes this same point even more clearly. Section 18 gives the FTC the authority to prohibit “unfair or deceptive acts or practices,” but it requires that the FTC regulate those unfair or deceptive acts or practices only in certain ways, pursuant to certain procedures. At the same time, that section of the statute makes clear that these limitations do not apply to the FTC’s regulation of unfair methods of competition: “The preceding [limitations] shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” The reference to “(including interpretive rules)” indicates that interpretive rules are merely a subset of the category of “rules” that the FTC is permitted to enact. The FTC’s authority must extend as well to legislative rules with the force of law, such as its rule banning noncompetes.
This authority has been confirmed by the courts, including, notably, the D.C. Circuit’s 1973 decision in National Petroleum Refiners Ass’n v. FTC, which upheld a rule requiring gas stations to post octane ratings on gas pumps. As the court noted, “there is simply no compelling evidence in the Act’s legislative history or in the language of the statute itself which would limit the exercise of [the FTC’s] power to the prosecutorial function or prevent the Commission from making that function more effective by rule-making.” Congress amended the FTC’s governing statute in 1975, two years after the D.C. Circuit decided National Petroleum Refiners Ass’n v. FTC. If Congress wished to curtail the rulemaking authority that the D.C. Circuit had just upheld, this would have been the moment to do so. Yet the new legislation, the Federal Trade Commission Improvements Act of 1975, did no such thing. Instead, it added the language in section 18, described above, which made explicit the FTC’s authority to regulate unfair methods of competition.
Critics of the rule and challengers like the U.S. Chamber of Commerce have concocted an array of feeble rebuttals to this straightforward exercise of statutory interpretation. In its complaint, the Chamber claims that the FTC’s interpretation of section 5 is “novel,” and that until recently the FTC believed that section 5 did not authorize it to challenge restraints of trade that harm input markets, including labor markets. That would be exceedingly strange if true. The Supreme Court has long recognized that the antitrust laws apply to input markets, including labor markets—as early as 1926 and as recently as 2021. Well before the antitrust laws were enacted, employment noncompetes were classified as restraints of trade in the common law, and it has long been understood that the antitrust laws incorporate the common law restraints of trade.
The Chamber points out that noncompetes have always been subject to rule of reason analysis, which requires courts to balance the costs and benefits of challenged restraints. It argues that the FTC is bound to that traditional standard, so it cannot declare a flat ban. But the FTC is exercising its authority to issue regulations—which would be a pointless exercise if they merely duplicated existing law. The FTC believes that the ban is necessary because existing law is inadequate. The antitrust laws and common-law regulation in most states, and even the bans in California and a few others, have failed to prevent employers from incorporating harsh noncompetes in contracts that they either enforce in court or use to threaten litigation against employees so as to intimidate them into staying on the job. The FTC has backed up this theory by citing numerous studies, the bulk of which show that noncompetes result in lower wages, higher prices, fewer startups, less innovation—in short, less competition, as the covenant not to compete openly proclaims with its very name. (An up-to-date survey of the literature by the leading scholar of noncompetes, Evan Starr, can be found here.)
Another notion floating about is that the rule violates the major questions doctrine, which holds that an agency is not permitted to issue a rule that produces sweeping economic and political consequences based on “cryptic” or ambiguous statutory language. The major questions doctrine is best understood as a rule of statutory interpretation: when the statutory language is unclear, and when the agency attempts to issue a boundary-stretching regulation pursuant to that language, courts should interpret the statute to bar the agency’s action. But the FTC’s authority to regulate “unfair methods of competition” is clear. It plainly encompasses contractual terms that block competition. A noncompete takes workers off the market, preventing entrants from hiring the people they need to challenge an incumbent, including incumbent monopolists. It reduces the mobility of workers, preventing them from moving to firms where they are most productive. Many noncompetes prevent workers from setting up firms that compete with their former employer. Moreover, the benefits claimed by noncompetes can be achieved more narrowly, without reducing competition. Trade secret law protects trade secrets by threatening employees who use proprietary information in other firms with jail. And employers can require trainees to repay the cost of retraining without preventing them from leaving work. Noncompetes are vastly overbroad for these traditional rationalizations.
West Virginia v. EPA, the 2022 case that gave rise to the major questions doctrine, involved the 2015 Clean Power Plan, President Barack Obama’s climate change regulation. That regulation was unlike anything the EPA had previously undertaken. Rather than regulating pollution emissions at the source—by mandating scrubbers on smokestacks, for instance—the agency proposed to reduce carbon dioxide emissions by forcing states to close coal-fired power plants and replace them with cleaner energy sources.
In his opinion for the Court, Chief Justice John Roberts cited this perceived expansion of EPA authority as evidence that the agency’s interpretation raised a major question. Precedents frowned upon “agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted,” Roberts argued. He complained that the EPA had “located that newfound power [to shut down power plants] in the vague language of an ‘ancillary provision[ ]’ of the Act, … one that was designed to function as a gap filler and had rarely been used in the preceding decades.” Or, as he put it elsewhere, “[n]or does Congress typically use oblique or elliptical language to empower an agency to make a ‘radical or fundamental change’ to a statutory scheme.” Here, by contrast, Congress plainly gave the FTC the authority to regulate anticompetitive contract provisions.
Roberts also observed that the EPA regulation that gave rise to that case came in the wake of repeated attempts and failures by Congress to pass comprehensive climate change legislation. That gave rise to an inference that Congress did not intend for the EPA to have the authority to regulate greenhouse gasses in the manner it sought to do with the Clean Power Plan. But there is no similar history here with noncompetes.
One might think that the major question doctrine is implicated because of the sheer scale of the impact of the ban. The FTC estimated that its noncompete ban would affect approximately 30 million workers—20% of the workforce—and raise their wages by more than $250 billion per year. But the shocking fact that 20% of the workforce is bound by noncompetes is precisely why the FTC’s regulation is necessary. It would be perverse if employers’ drastic overuse of noncompetes—one of the major reasons for the backlash against them—were converted into a reason why the FTC can’t regulate at all. If that argument were accepted, EPA clean-air regulations that have produced hundreds of billions of dollars of benefits would all be illegal simply because the benefits are so large. But that is not how courts have treated environmental regulation, and that is not how courts should treat the noncompete rule. In any event, the scale of the rule’s impact is beside the point. Where, as here, a statute plainly authorizes an agency to regulate, the major questions doctrine does not come into play.
More than 75 years ago, the Supreme Court held in the 1947 case SEC v. Chenery that agencies with the power to regulate either through adjudication or through rule-making may choose whichever mode of regulation they believe is most appropriate. Twenty-six years later, in upholding the FTC’s octane ratings rule, the D.C. Circuit wrote that “it is hard to escape noting that the policy innovation involved in this case underscores the need for increased reliance on rule-making rather than adjudication alone.” The same is true here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
