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The FTC Noncompete Ban Is Legal

 |  May 10, 2024

By: Jonathan Masur & Eric A. Posner (Pro Market)

Some analysts argue that the Federal Trade Commission’s prohibition of noncompete agreements faces legal challenges, though the precise grounds are elusive. There’s a tacit assumption that either the Supreme Court or conservative-leaning lower courts will resist the FTC’s regulatory reach, conjuring up justifications in due course. As one observer noted, any regulatory action significant enough to grab headlines in The New York Times is likely to face judicial scrutiny. While judicial intent is inscrutable, revisiting basic principles of administrative law seems prudent.

The FTC functions as an administrative body, and currently, it’s established in U.S. law that Congress can empower agencies to shape policy through regulations, with courts deferring to these policy decisions as long as procedural criteria are met and decisions are reasonable. Numerous regulations, spanning from environmental protection mandates by the EPA to corporate transparency standards by the SEC, rely on this legal framework. Even the present conservative-leaning Supreme Court majority hasn’t signaled an intent to dismantle administrative regulation entirely, preferring instead to refine its scope incrementally.

The FTC’s authority to enact the noncompete prohibition isn’t a marginal case. Section 5 of the FTC Act of 1914 empowers the FTC to prevent companies from employing “unfair methods of competition.” Congress deliberately chose this broad language to encompass anticompetitive practices both covered by existing antitrust laws and extending beyond them. Like many regulatory bodies before and after, the FTC was vested with the power to interpret laws, effectively setting policy within legal boundaries. Given that noncompete agreements are essentially restraints on trade, the statute clearly empowers the FTC to regulate them.

While historically, the FTC has relied more on case-by-case adjudication than rulemaking, section 6(g) of the Act authorizes the FTC to “make rules and regulations” to fulfill the Act’s provisions. This language, common across federal statutes, has consistently enabled agencies to issue binding regulations, a practice repeatedly upheld by the courts. Some argue that the FTC’s rulemaking authority is limited to “interpretive” rules or general policy statements. However, the text of section 6(g) doesn’t support this restriction.

Further clarification comes from section 18 of the Act, which permits the FTC to prohibit “unfair or deceptive acts or practices” but imposes specific regulatory procedures. Importantly, this section exempts the regulation of unfair competition methods from these limitations, explicitly stating that they do not affect the FTC’s authority to prescribe rules or general policy statements. The mention of “interpretive rules” implies they’re just one type of rule the FTC can enact, suggesting that its authority extends to legislative rules with legal force, including the noncompete ban…