The FTC’s non-compete order is legal

Authors: Jonathan Masur and Eric A. Posner (Pro Market)

Some analysts say the Federal Trade Commission’s ban on non-compete agreements faces legal challenges, although the exact basis is elusive. There is a tacit assumption that either the Supreme Court or conservative-leaning lower courts will oppose the FTC’s regulatory reach, conjuring timely justifications. As one observer noted, any regulatory action significant enough to make headlines in The New York Times is likely to be subject to judicial review. While the judicial intent is unclear, it seems prudent to reconsider the basic principles of administrative law.

The FTC serves as an administrative body and currently provides in U.S. law that Congress can authorize agencies to make policy through regulations, with courts deferring those policy decisions as long as procedural criteria are met and the decisions are reasonable. Numerous regulations, from EPA environmental mandates to corporate transparency standards issued by the SEC, rely on this legal framework. Even the current conservative majority of the Supreme Court has not signaled any intention to completely eliminate administrative regulations, preferring instead to gradually clarify their scope.

The FTC’s power to impose a non-compete clause is not a marginal case. Section 5 of the FTC Act of 1914 gives the FTC authority to prevent businesses from using “unfair methods of competition.” Congress intentionally chose this broad language to cover anticompetitive practices both covered by and beyond existing antitrust laws. Like many regulators before and since, the FTC had the authority to interpret regulations, effectively setting policy within legal boundaries. Given that non-compete agreements are essentially restraints of trade, the Act expressly authorizes the FTC to regulate them.

Although historically the FTC has relied more on case-by-case adjudication than rulemaking, Sec. 6 letter (g) of the Act authorizes the FTC to “prescribe rules and regulations” to implement the provisions of the Act. This language, common to all federal statutes, has consistently allowed agencies to issue binding regulations, a practice repeatedly affirmed by courts. Some argue that the FTC’s rulemaking authority is limited to “interpretive” rules or general policy statements. However, the text of section 6(a) g) does not confirm this limitation.

Further explanations come from Art. 18 of the Act, which allows the FTC to prohibit “unfair or deceptive acts or practices” but imposes certain regulatory procedures. Importantly, this section exempts regulation of unfair competition methods from these restrictions, expressly stating that they do not affect the FTC’s authority to set rules or general policy statements. The mention of “interpretive rules” suggests that these are just one type of rule the FTC can enact, implying that its authority extends to legislative provisions with the force of law, including non-compete provisions…