Gus Hurwitz replies to Jonathan Masur and Eric Posner’s May 8 article defending the Federal Trade Commission’s Congressional mandate to enforce a rule banning noncompetes. He argues that Congressional responses to FTC rulemaking in the 1970s suggest courts are unlikely to find that the FTC possesses such authority, either as a matter of statutory interpretation or under the major questions doctrine.
In a recent article for ProMarket, Jonathan Masur and Eric Posner defend the legality of the Federal Trade Commission’s rule banning noncompetes. However, little of their argument addresses the widespread contrary arguments against the ban.
On the Yale Journal of Regulation Notice and Comment Blog, Dan Crane recently shared the results of an informal survey of antitrust and administrative law professors. Of his 17 respondents, “Only one person predicted that the rule will be upheld.” Both the Wall Street Journal and Washington Post editorial boards have argued that the FTC lacks congressional authority to issue the rule. While it is risky to draw inference from silence, it seems notable that the New York Times editorial board, a long-time advocate for FTC Chair Lina Khan and early supporter of the noncompete rule, has not opined. A recent Congressional Research Service report characterizes the FTC’s legal authority to issue such rules as “unsettled.”
Masur and Posner start their analysis from a noncontroversial premise, that “it is settled law in the United States that Congress can give agencies the authority to make policy by issuing regulations.” But they quickly steer into controversy, asserting that “The FTC’s statutory authority to issue the noncompete rule is not an edge case” and that because “a noncompete is just a restraint of trade that restricts competition, the statute plainly authorizes the FTC to issue a rule regulating noncompetes.” As a review of Congressional action following the FTC’s embrace of rulemaking in the 1970s and the Supreme Court’s recent major questions opinions shows, neither of these statements is clearly true.
Agency authority prior to National Petroleum Refiners
The starting point for discussion is, as Masur and Posner note, Congress’ grant of authority to the FTC in the 1914 Federal Trade Commission Act—though the focus falls primarily on developments in the 1970s into the 1980s, when the FTC made aggressive use of this authority and the courts and Congress responded. The FTC Act gives the FTC two distinct areas of relevant authority: that to proscribe unfair methods of competition and that to proscribe unfair or deceptive acts or practices. As Tom Merrill and Kathyn Watts argued in the 2002 Harvard Law Review, there is “significant evidence that Congress did not intend to grant legislative rulemaking authority to the FTC.” Notably, unlike other statutes that do confer such authority, Merrill and Watts note that the FTC Act provides no mechanism for the FTC to sanction those who violate its rules. It is unsurprising, therefore, that for nearly 50 years the FTC issued no rules relying on its unfair methods of competition authority. Only one such rule relying solely on this authority was issued. Issued in 1962, it was never enforced and subsequently repealed.
Then, in 1970, the FTC issued a substantive trade rule using this authority, requiring gas stations to post octane information at gas pumps. Industry challenged the rule, which ultimately gave rise to D.C. Circuit Court of Appeals Judge Skelly Wright’s famous National Petroleum Refiners opinion. This opinion affirmed the FTC’s rules, finding authority to issue them in Section 6(g)’s authority to “make rules and regulations for the purpose of carrying out the provisions of” the Act. As described by Merrill and Watts, Judge Wright’s opinion offered “a skillful exposition and selective quotation” from cases considering similar statutory language and “pronounced the [legislative] history to be ambiguous regarding the meaning of Section 6(g),” despite there being “significant evidence that Congress did not intend to grant legislative rulemaking authority to the FTC.”
Masur and Posner also recount the tale of the National Petroleum Refiners case, but in a way that omits any sense that the case is controversial or limited to the D.C. Circuit. To be clear: it is very controversial. Many leading scholars believe that it would not be decided the same way today. Tom Merrill and Kathryn Watts argued forcefully that the opinion was wrong in 2002. Former FTC Chair Bill Kovacic has written that the Supreme Court “might not be so generous to the Commission” today as the DC Circuit was in 1973 should it rely on the case. And Richard Pierce, author of a popular Administrative Law casebook, argued in 2020 that no current Supreme Court Justice uses the interpretive methods used by judge Wright – he even teaches National Petroleum Refiners “as an illustration of something no modern court would do.” Moreover, challenges to the noncompete rule have been filed in the 5th Circuit, where Wright’s opinion holds no authority.
Congressional responses to FTC rulemaking
Nevertheless, Masur and Posner go on to make the following very important point regarding the meaning of National Petroleum Refiners:
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.
This is the crux of this issue: the FTC Act was the focus of extensive congressional attention in the years following National Petroleum Refiners, and Congress considered FTC rulemaking authority in amendments to the FTC Act enacted in 1975 and 1980. These amendments are more important to our contemporary understanding of the agency’s rulemaking authority than the opinions that preceded them. The lesson to take from this Congressional attention is far from the straightforward account offered by Masur and Posner.
The specific amendments are the Magnuson Moss Warranty-Federal Trade Commission Improvements Act of 1975 and the Federal Trade Commission Improvements Act of 1980. The 1975 Act put in place Section 18, which includes particularized rulemaking procedures for rules relating to unfair or deceptive acts or practices. As Masur and Poser correctly note, these procedures do “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.”
That’s true, but it doesn’t settle the matter; rather, it begs the question of how Congress understood that authority. The legislative history from the 1975 Act is thin on this point, but it is sufficient (especially when read alongside the 1980 Act) to tell us that the answer is: “it’s complicated.”
The December 18, 1974 Conference Report characterizes the bill in the same way that Masur and Posner (and the text of the adopted amendments) do, explaining that the bill “does not affect any authority of the FTC under existing law to prescribe rules with respect to unfair methods of competition in or affecting, commerce.” But floor statements discussing the final bill suggest disagreement about what that existing authority was. In the House, Representative Joel Broyhill (R-Va.) explained that the Act:
. . . does not affect any authority the FTC might have to promulgate rules which respect to “unfair methods of competition” including, of course, antitrust prohibitions. I myself do not believe that the FTC has any such authority. I am advised that there is a passing reference in the appellate court decision in the [Petroleum Refiners]case, to the effect that the FTC may have some kind of authority to issue some kind of antitrust rules. But the case, of course, did not deal with antitrust rules. Antitrust rules would obviously have a far more pervasive effect than rules defining unfair or deceptive acts or practices, and I would feel very uncomfortable giving such antitrust rules the same effect as this bill gives consumer practice rules. Accordingly, we have made clear that the new bill does not deal with the antitrust laws.
Senator Philip Hart (D-Mich.) cited the Petroleum Refiners opinion and then explained that the 1975 Act was “not intended to affect the Commission’s authority to prescribe and enforce rules respecting unfair methods of competition. Rules respecting unfair methods of competition should continue to be prescribed in accordance with the Informal rulemaking procedures of section 553, title 5, United States Code.” He went on to explain that the Act intentionally created different rulemaking approaches for unfair methods of competition rules and unfair or deceptive acts or practices rules:
This dual approach by the Commission in prescribing rules will afford the Congress the unique opportunity to assess and compare actual experience and results under somewhat different approaches to the rulemaking process, and it is expected that FTC will promptly commence rulemaking proceedings under both procedures. An assessment and comparison in the 18-month study of the experiences and results of this dual approach to FTC rulemaking will facilitate future congressional determination of what, if any, changes should be made in title 2 of this bill.
As early as 1976, Congress began the work that would lead to the 1980 Act, which included some reconsideration of the FTC’s rulemaking authority. Following adoption of the 1975 Act, the FTC undertook aggressive rulemaking under the new provisions for unfair or deceptive acts or practices. This led to national controversy, with the Washington Post in 1978 dubbing the FTC the “National Nanny.” Congress debated what to do about the FTC for several years, including expressly de-authorizing agency rulemaking in 1980 Continuing Resolutions.
The history of the 1980 Act offers additional perspective on the unclear intent of the 1975 Act, with Senator Wendell Ford (D-Ky.) noting that “in the view of many there are unresolved legal issues regarding the existence and scope of section 6(g) rulemaking authority. The conference report notes this issue, but as Congress did in 1975, leaves it an open question.”
There is good reason that the 1980 Act did not further resolve the question of the agency’s rulemaking authority. Prompted by the FTC’s aggressive rulemaking under its unfair or deceptive acts and practices authority, Congress imposed a legislative veto on all FTC rules. As explained by the senators who introduced the legislative-veto provision:
[T]he Committee bill is responsive to the problems resulting from past abuses. Chairman Pertschuk admitted that such abuses have occurred when he told the Committee that some FTC staff members waged a “vendetta” against certain industries in the development of rulemaking proposals in the past. . . . . [W]e intend to offer a floor amendment to provide for a legislative veto of proposed FTC rules. . . . The broad legislative mandate given to the Federal Trade Commission by Congress makes the passage of legislative veto legislation essential.
Returning to the Senate floor statements on the bill’s adoption, it was explained that, while “redefining an agency’s authority through legislation such as this FTC bill is a more desirable means for reform, it was necessary to reach some accommodation with the House on this issue,” and that “the real reason that we have proposed this legislation for the FTC is because the Commission appeared to be fully prepared to push its statutory authority to the very brink and beyond.”
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So where does this leave us? As Masur and Posner said, “If Congress wished to curtail the rulemaking authority that the D.C. Circuit had just upheld, [following the Petroleum Refiners opinion] would have been the moment to do so.” And, indeed, Congress heeded that call. Members of the House thought that the FTC’s rulemaking authority under that opinion did not extend to antitrust rules; senators thought that it did, but that the issue should be reviewed after some years of FTC rulemaking activity. After the FTC’s aggressive rulemaking activity in the subsequent years, Congress imposed a legislative veto on all FTC rulemaking authority. It is impossible to read this as an unequivocal endorsement of the FTC’s authority to issue rules such as the noncompete rule.
Of course, the Supreme Court invalidated single-house legislative vetoes in Chadha, and then two-house legislative vetoes such as that used in the 1980 Act in Process Gas. The veto adopted by Congress in 1980 automatically phased out after three years, so it is no longer even in the Act. But more importantly, the FTC was chastened. Congress had made clear the limits of the FTC’s authority, and those limits were respected without the need for statutory revision for 40 years.
Legality of the noncompete rule today
In their piece, Masur and Posner chide critics of the noncompete rule for having “difficulty agreeing why, or even articulating why” the rule is illegal. But this is difficult only to the extent that there are so many ways in which and so many grounds on which the rule could be found to exceed the FTC’s authority. Multiple legal scholars have explored these faults; the Congressional Research Service has, as well. Some argue that the rule’s breadth is factually unsupportable. I agree that the literature does not support its breadth, but I also expect that the courts would defer to the factual support under State Farm and related precedents. As the bulk of this response articulates, others suggest that the courts are unlikely to affirm the FTC’s substantive rulemaking authority under Section 6(g). And there is also the possibility that the courts (especially the Supreme Court) would reject the rule as presenting a major question beyond the clearly articulated scope of the FTC’s authority.
Another several thousand words could easily be written on the major questions issue. But I don’t have that, so will only respond briefly to Masur and Posner’s concern that “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.” And offer some reflection on how the 1980 amendments to the FTC Act bear on this question.
To Masur and Posner’s concern, would it be perverse for the Federal Drug Administration’s long-standing non-regulation of tobacco to lead to an arguable need to regulate it as a drug? Or the Environmental Protection Agency’s long-standing non-regulation of greenhouse gasses in electricity transmission, distribution, and other non-generation industries to lead to an arguable need for environmental regulation in those industries? I expect Masur and Posner would say yes. But the Supreme Court’s response in those cases has been that, if it’s so lamentable, Congress should do something about it. I believe that how the Court has decided such prior cases informs how courts will assess the legality of the noncompete rule.
Or perhaps the Court’s response would be that the agency in question shouldn’t exercise newfound authority because Congress (or the states) already is working to address the issue through other regulatory vehicles. Congress was concerned about just this sort of thing when it sought to check the FTC’s authority with a legislative veto. In introducing the legislative veto in the 1980 Act, concern was expressly noted that:
The FTC claims the power to declare any commercial act, practice or commission to be “unfair”, regardless of State law, and thereby to amend all State statutes and reverse all State cases which may be inconsistent with its declaration. All 50 state legislatures and State supreme courts can agree that a particular act is fair and lawful, but the five-man appointed FTC can overrule them all.
Many states have seen fit to regulate noncompete clauses, both via legislation and state common law; others have thought such regulation largely unnecessary, although their courts may require the terms of noncompetes to be “reasonable.” Congress is well aware of the issue, but has seen fit not to act, other than through the broad regulatory authority overseen through an entire Department of Labor headed by a dedicated (cabinet-level) secretary of labor. This is not an area where regulation is not otherwise possible, necessitating the FTC to intervene. Rather, it is an area into which the FTC has sought to construct previously unheralded authority in order to affect broad changes to the American economy, in an area already heavily regulated by other laws and agencies.
It is, of course, uncertain whether the courts will reject the FTC’s rule under the major questions doctrine that asks if an agency’s action is supported by clear Congressional authorization. However, it is a real possibility, and it calls into question Masur and Posner’s argument that the FTC’s rule is legal.
Ultimately, we must conclude in the same place that both Masur and Posner, as well as this discussion, began: the question is whether Congress has given the FTC the authority to make policies such as the noncompete rule by issuing regulations. Contrary to Masur and Posner’s view in favor of this rule, there is substantial reason to believe that courts will find that Congress has not granted such authority. A review of Congressional action following the FTC’s expansive use of its rulemaking authority, including imposition of a legislative veto on the FTC’s rules, suggests a limited view of any Congressional grant of rulemaking authority. This is redoubled by the Court’s recent embrace of the major questions doctrine: it is not enough that an agency asserting broad authority have have a defensible argument to such authority—that is has such authority must be clear. Again, given the concerns expressed by members of Congress that led to the adoption of the legislative veto, it is clear here that such clarity is clearly lacking.
Author Disclosure: The author reports no conflict of interest
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
