Bloomberg Law
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Law
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

Worker Noncompete Ban Proposal Promises FTC Authority Fight (1)

Jan. 5, 2023, 8:42 PMUpdated: Jan. 5, 2023, 10:38 PM

The Federal Trade Commission’s aggressive bid to free workers from restrictive noncompete agreements is likely to spark a court challenge testing the scope of the agency’s powers.

The commission Thursday proposed a rule barring noncompete agreements, citing its ability to move against unfair methods of competition under Section 5 of the FTC Act. The proposal represents its most ambitious foray into competition regulation in decades.

Legal scholars have long disagreed about the scope of the agency’s competition rulemaking authority. If finalized in its current form, critics say the proposal could draw fire in several ways, including under the major questions doctrine the US Supreme Court invigorated last year.

“In addition to the text of the statute, the structure and purpose of the statute, legislative history all support the authority that we’ll be exercising,” FTC Chair Lina Khan told reporters Wednesday. “I think there’s very strong support for us taking this action.”

Noncompete agreements cover up to one in five American workers, the FTC said, limiting their ability to move between employers who might compete for their labor with higher wages.

It’s unclear whether a final agency rule barring the practice would survive in court. Commissioner Christine Wilson, the sole Republican appointee, dissented from the proposal, saying the agency is “vulnerable to meritorious challenges” on several fronts, including the major questions doctrine.

“In short, today’s proposed rule will lead to protracted litigation in which the Commission is unlikely to prevail,” Wilson wrote.

‘Silent and Absent’

In its proposal, the commission argued that its power to regulate noncompete agreements flows from two parts of the FTC Act: Section 5, which declares unfair methods of competition illegal and directs the agency to police it; and another provision allowing the agency to “make rules and regulations for the purpose of carrying out” the law.

Khan, in the Wednesday press briefing, pointed to the US Court of Appeals for the D.C. Circuit’s 1975 decision in National Petroleum Refiners Ass’n v. FTC, in which the court said the commission has authority to issue competition-related rules.

“The FTC Act is very clear,” Khan said. “The text of the statute grants the FTC authority to pursue rules under 6(g) of the FTC Act. This includes rules that would prohibit unfair methods of competition. There is clear precedent on this point under National Petroleum Refiners.”

But Richard Pierce, a law professor at George Washington University Law School, said the D.C. Circuit decision is a weak justification.

“It’s highly unlikely that it would be upheld by the Supreme Court today,” Pierce said. “I continue to be extremely skeptical that FTC has power to use notice and comment rulemaking to define an unfair method of competition.”

The US Chamber of Commerce quickly criticized the proposal, saying a lack of a direct congressional grant of rulemaking power would doom the rule.

“Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful,” Sean Heather, a senior vice president at the Chamber, said in a statement. “Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.”

The Chamber is prepared to challenge the rule in court “when the time comes,” Heather told reporters on a Thursday call. He argued that the FTC has no authority to issue rules to proscribe unfair methods of competition.

Congress gave the agency the power to regulate unfair and deceptive practices after the D.C. Circuit’s decision in National Petroleum Refiners with the Magnuson-Moss Act.

“Banning non-competes will increase worker power and mobility and result in a more dynamic economy that benefits all,” said Sandeep Vaheesan, legal director of the anti-monopoly nonprofit the Open Markets Institute, in a statement. “We believe the public comments on the proposal, notably from workers and unions and advocates that represent them, will only bolster the FTC’s evidentiary case for enacting a full ban in its final rule.”

But the FTC Act is “silent and absent” on the agency’s power to issue rules on unfair methods of competition, Heather said.

Major Questions

Even if a court finds that the FTC Act gives the agency the power to issue a rule prohibiting noncompete agreements, the question would then become how obvious the grant of authority was.

The major questions doctrine requires that Congress must speak clearly when empowering agencies to regulate issues of vast significance. That once-obscure doctrine gained prominence last year after the Supreme Court invoked it to block OSHA’s vaccinate-or-test rule and invalidate the EPA’s Clean Power Plan.

The Supreme Court hasn’t plainly defined what qualifies as a major question, though it’s provided some guidelines, said Jeffrey Lubbers, an administrative law professor at American University.

For example, the economic impact of the rule—estimated at nearly $300 billion in increased wages per year—could make the issue of noncompetes a major question, Lubbers said. The fact that FTC is asserting the power to issue binding rules for unfair methods of competition could be a major question, separate from the substance of the rule itself, he added.

The Supreme Court’s focus on the major questions doctrine could make the FTC’s clear power to issue the rule irrelevant, said Catherine Fisk, a workplace law professor at the University of California-Berkeley.

“We could see a major questions doctrine challenge arguing that whether noncompetes are good competition policy is something to be decided by Congress, not an agency,” Fisk said. “The challenge is that the FTC is given broad power. The federal statute doesn’t have a lot of specific provisions.”

“Betting people would say that wherever big business comes down, that is likely to be where the Supreme Court comes down,” Fisk added.

(Updated with additional reporting throughout.)

To contact the reporter on this story: Dan Papscun in Washington at dpapscun@bloombergindustry.com; Robert Iafolla at riafolla@bloombergindustry.com

To contact the editor responsible for this story: Keith Perine at kperine@bloomberglaw.com