The Federal Trade Commission (FTC) recently extended the public comment period for its proposed ban on non-compete agreements. This proposed rule would ban the use of all non-compete agreements and any other agreement that serves the same purpose. The FTC claims such a ban would protect workers and promote competition, resulting in increased innovation. Regardless of the purported ills this policy aims to address, the legal bedrock on which it stands is dubious and may constitute agency overreach.
The Commission’s authority over non-compete agreements stems from sections 5 and 6(g) of the FTC Act. Section 5 prohibits “unfair or deceptive acts or practices in or affecting commerce” while section 6(g) grants the FTC authority “to make rules and regulations for the purpose of carrying out the provisions of this subchapter [section 5].” Together these acts provide the justification for the FTC’s authority to make rules and regulations. For a rule to be warranted, it must address something “unfair or deceptive,” which this recent non-compete ban does not do.
The FTC used two court cases in its notice for proposed rulemaking (NPRM) to justify the ban. The first is U.S. v. Am. Tobacco Co., U.S. 106, 183 (1911), and the second is Newburger, Loeb & Co., Inc. v. Gross, 663 F.2d 1057, 1082 (1977). In the first case, the courts isolated “constantly recurring” non-competes. An isolated scope makes it questionable whether the FTC could extend this ruling to non-competes that don’t have a recurring basis. For the second case, the courts reviewed a partnership agreement and acknowledged the value of non-competes in preserving trade secrets. Neither case backs up the Commission’s sweeping ban on all non-competes and thus is not a useful precedent for implementing such a policy.
If non-compete agreements don’t constitute an “unfair or deceptive [act] or [practice],” the institution of a ban would mean the FTC is taking actions that expand beyond the scope of its powers.
Furthermore, there is a demonstrated precedent for reining in agencies that go beyond their original scope. In West Virginia v. EPA, the Supreme Court ruled against “agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.” This argumentation falls under what is called the Major Questions Doctrine, and it stipulates that in cases where an agency may be stepping outside its statutory authority as granted by Congress, judgment merits a greater degree of skepticism.
Regarding the proposed ban on non-competes, the Commission’s actions may fall outside the statutory authority granted to it by Congress. Commissioner Wilson of the FTC stated that a challenge of this sort has merit and the potential to strike down further action on the agency’s part. Though the FTC has existed for more than a century, this ban represents the first time that section 5 has been applied to “unfair methods of competition. This could be because non-competes are mutually agreed upon with full knowledge of the agreement’s contents. An action like this has yet to be interpreted as ‘unfair or deceptive.’”
For a court to find the Commission’s recent rulemaking unlawful, it would not necessarily need to show that non-competes fall outside the purview of section 5. All that would need to be demonstrated is that the Commission’s jurisdiction in this matter is unclear. Using the Major Questions Doctrine, the court’s high degree of skepticism toward this authority could lead to a rejection of powers.
The future of this rule remains uncertain, much like the legal ground on which it stands. It remains to be seen how the courts will handle legal challenges to the Commission’s authority, though without a strong precedent, the agency may struggle to make a case.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit educational and research organization. You can follow his work on Twitter @ConsumerPal.