The FTC Doesn’t Have the Power to Issue Substantive Rules (1)

The Federal Trade Commission has proposed to issue a substantive rule that would ban all non-compete clauses in employment contracts by declaring them to be unfair methods of competition. The proposal has a fatal flaw—the FTC doesn’t have the power to issue substantive rules.

The commission relies on a phrase in the FTC Act of 1914 and a 1973 court opinion to support its claim of authority. Read in isolation, the phrase seems to support the FTC’s claim of authority. Section 6(g) includes the language “[the FTC has the power] to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”

Statutory language should never be read in isolation, however. In context, the phrase the FTC relies on can’t bear the meaning the commission attributes to it. Section 5 of the FTC Act prohibits “unfair methods of competition” and provides a detailed description of the procedure the FTC must use to act against a firm that uses an unfair method of competition.

That procedure is adjudication. If the FTC believes that a firm is using an unfair method of competition, it must initiate an action against the firm where it bears the burden of proving that the firm is engaging in an unfair method of competition.

The phrase the commission relies on is buried deep in section 6 of the FTC Act. That section describes the commission’s powers to conduct investigations and publish reports. The phrase is in section 6(g), titled “classification of corporations.” That section empowers the FTC to “classify corporations and to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”

The statute makes no other reference to rules. Thus, for instance, it says nothing about the procedures the FTC must use to issue rules or the procedures it can use to enforce any rules that it makes.

The FTC Act was enacted in 1914. Immediately after the statute was enacted, the commission interpreted section 6(g) to confer on it only the power to issue rules of procedure applicable to its powers to conduct adjudications and investigations. For 48 years, the FTC took the position in congressional testimony and court proceedings that it didn’t have the power to issue substantive rules.

Congress relied on the FTC’s interpretation of the Act as the basis to enact several statutes that explicitly gave FTC the power to issue substantive rules in narrow circumstances. Courts relied on the FTC’s interpretation as the basis for extremely important decisions. For instance, in its landmark 1935 opinion in Humphrey’s Executor v. United States, the Supreme Court upheld the statutory limit on the president’s power to remove an FTC commissioner based on its conclusion that the FTC isn’t part of the executive branch because it performs only “quasi adjudicative” and “quasi legislative” functions.

It’s highly unlikely that the court would have upheld the limit on the president’s power to remove an FTC commissioner if it had believed that the FTC had the power to issue substantive rules.

After consistently interpreting the FTC Act not to give it the power to issue substantive rules for 48 years, FTC suddenly discovered that it had that power and began to assert it. Scholars were surprised when a panel of the US Court of Appeals for the D.C. Circuit upheld an exercise of that power in its 1973 opinion in National Petroleum Refiners v. FTC.

The interpretative methodology the D.C. Circuit panel used might charitably be called the power of wishful thinking. The court described at length the ways the power to issue substantive rules can enhance the effectiveness of a regulatory agency. It then quoted the phrase from section 6(g) out of context and held that the FTC must have the power to issue substantive rules because Congress wanted the FTC to be an effective regulatory agency.

The method of statutory interpretation the court used in National Petroleum Refiners was rare at the time. It’s unheard of today. The D.C. Circuit’s 1973 decision doesn’t bind the Supreme Court or any other court. Any modern court would consider the linguistic and historic context in which the brief reference to rules appears in the FTC Act. It would agree with the FTC’s initial longstanding interpretation of the Act to grant it only the power to issue procedural rules and not to issue substantive rules.

To the extent there’s any doubt about the FTC’s lack of authority to issue substantive rules, a modern court would resolve that doubt by invoking the major questions doctrine. Under that doctrine, an action is beyond an agency’s authority if it’s unprecedented, it’s supported only by broad language in an old statute, and has major economic and political effects.

According to the FTC, its proposed rule to ban non-compete clauses in employment contracts would change the law in 47 states and increase wages by $300 billion dollars per year. It’s a perfect candidate for application of the major questions doctrine.

The case is Nat’l Petroleum Refiners Ass’n v. FTC, D.C. Cir., 6/27/73.

(Corrects seventh paragraph to reflect FTC Act date of enactment)

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Richard J. Pierce, Jr. is professor of law at George Washington University Law School. He has written over 20 books and 130 articles on administrative law and regulatory practice.

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