The Federal Trade Commission (FTC) announced in a notice of proposed rulemaking (NPRM) last month that it intends to ban most noncompete agreements. Is that a good idea? As a matter of policy, the question is debatable. So far as the NPRM is concerned, however, that debate is largely hypothetical. It is unlikely that any rule the FTC issues will ever take effect.
Several formidable legal obstacles stand in the way. The FTC seeks to stand its rule on the authority of Section 5 of the FTC Act, which bars “unfair methods of competition” in commerce. But Section 5 says nothing about rulemaking, as opposed to case-by-case prosecution.
There is a rulemaking provision in Section 6, but for reasons explained elsewhere, it only empowers the FTC to set out its own internal procedures. And if the FTC could craft binding substantive rules—such as a ban on noncompete agreements—that would violate the U.S. Constitution. It would transfer lawmaking power from Congress to an administrative agency, in violation of Article I.
What’s more, the U.S. Supreme Court recently confirmed the existence of a “major questions doctrine,” under which an agency attempting to “make major policy decisions itself” must “point to clear congressional authorization for the power it claims.” The FTC’s proposed rule would sweep aside tens of millions of noncompete clauses; it would very likely alter salaries to the tune of hundreds of billions of dollars a year; and it would preempt dozens of state laws. That’s some “major” policymaking. Nothing in the FTC Act “clear[ly]” authorizes the FTC to undertake it.
But suppose that none of these hurdles existed. Surely, then the FTC would get somewhere—right? In seeking to convince a court to read the statute its way, after all, it could make a bid for Chevron deference. Named for Chevron v. NRDC (1984), that rule (of course) requires a court to defer to an agency’s reasonable construction of a law the agency administers. With the benefit of such judicial obeisance, the FTC would not have to show that noncompete clauses are unlawful under the best reading of Section 5. It could get away with showing merely that they’re unlawful under a plausible reading of Section 5.
But Chevron won’t do the trick.
The Chevron test can be broken down into three phases. A court begins by determining whether the test even applies (often called Chevron “step zero”). If it does, the court next decides whether the statute in question has a clear meaning (Chevron step one). And if it turns out that the statute is unclear—is ambiguous—the court proceeds to ask whether the agency’s interpretation of the statute is reasonable, and if it is, to yield to it (Chevron step two).
Each of these stages poses a problem for the FTC. Not long ago, the Supreme Court showed why this is so. True, Kisor v. Wilkie (2019) is not about Chevron deference. Not directly. But the decision upholds a cognate doctrine, Auer deference (named for Auer v. Robbins (1997)), under which a court typically defers to an agency’s understanding of its own regulations. Kisor leans heavily, in its analysis, both on Chevron itself and on later opinions about the Chevron test, such as United States v. Mead Corp. (2001) and City of Arlington v. FCC (2013). So it is hardly surprising that Kisor makes several points that are salient here.
Start with what Kisor says about when Chevron comes into play at all. Chevron and Auer stand, Kisor reminds us, on a presumption that Congress generally wants expert agencies, not generalist courts, to make the policy judgments needed to fill in the details of a statutory scheme. It follows, Kisor remarks, that if an “agency’s interpretation” does not “in some way implicate its substantive expertise,” there’s no reason to defer to it.
When is an agency not wielding its “substantive expertise”? One example Kisor offers is when the disputed statutory language is derived from the common law. Parsing common-law terms, Kisor notes, “fall[s] more naturally into a judge’s bailiwick.”
This is bad news for the FTC. Think about it. When it put the words “unfair methods of competition” in Section 5, could Congress have meant “unfair” in the cosmic sense? Could it have intended to grant a bunch of unelected administrators a roving power to “do justice”? Of course not. No, the phrase “unfair methods of competition” descends from the narrow, technical, humdrum common-law concept of “unfair competition.”
The FTC has no special insight into what the term “unfair competition” meant at common law. Figuring that out is judges’ work. That Congress fiddled with things a little does not change this conclusion. Adding the words “methods of” does not rip the words “unfair competition” from their common-law roots and launch them into a semantic void.
It remains the case—as Justice Felix Frankfurter put it—that when “a word is obviously transplanted” from the common law, it “brings the old soil with it.” And an agency, Kisor confirms, “has no comparative expertise” at digging around in that particular dirt.
The FTC lacks expertise not only in understanding the common law, but even in understanding noncompete agreements. Dissenting from the issuance of the NPRM, (soon to be former) Commissioner Christine S. Wilson observed that the agency has no experience prosecuting employee noncompete clauses under Section 5.
So the FTC cannot get past Chevron step zero. Nor, if it somehow crawled its way there, could the agency satisfy Chevron step one. Chevron directs a court examining a text for a clear meaning to employ the “traditional tools” of construction. Kisor stresses that a court must exhaust those tools. It must “carefully consider the text, structure, history, and purpose” of the regulation (under Auer) or statute (under Chevron). “Doing so,” Kisor assures us, “will resolve many seeming ambiguities.”
The text, structure, history, and purpose of Section 5 make clear that noncompete agreements are not an unfair method of competition. Certainly not as a species. “‘Unfair competition,’ as known to the common law,” the Supreme Court explained in Schechter Poultry v. United States (1935), was “a limited concept.” It was “predicated of acts which lie outside the ordinary course of business and are tainted by fraud, or coercion, or conduct otherwise prohibited by law.” Under the common law, noncompete agreements were generally legal—so we know that they did not constitute “unfair competition.”
And although Section 5 bars “unfair methods of competition,” the altered wording still doesn’t capture conduct that isn’t unfair. The Court has said that the meaning of the phrase is properly “left to judicial determination as controversies arise.” It is to be fleshed out “in particular instances, upon evidence, in the light of particular competitive conditions.” The clear import of these statements is that the FTC may not impose broad prohibitions that sweep in legitimate business conduct.
Yet a blanket ban on noncompete clauses would inevitably erase at least some agreements that are not only not wrongful, but beneficial. “There is evidence,” the FTC itself concedes, “that non-compete clauses increase employee training and other forms of investment.” Under the plain meaning of Section 5, the FTC can’t condemn a practice altogether just because it is sometimes, or even often, unfair. It must, at the very least, do the work of sorting out, “in particular instances,” when the costs outweigh the benefits.
By definition, failure at Chevron step one entails failure at Chevron step two. It is worth noting, though, that even if the FTC reached the final stage, and even if, once there, it convinced a court to disregard the common law and read the word “unfair” in a colloquial sense, it would still not be home free. “Under Chevron,” Kisor states, “the agency’s reading must fall within the bounds of reasonable interpretation.” This requirement is important in light of the “far-reaching influence of agencies and the opportunities such power carries for abuse.”
Even if one assumes (in the teeth of Article I) that Congress could hand an independent agency unfettered authority to stamp out “unfairness” in the economy, that does not mean that Congress, in fact, did so in Section 5. Why did Congress write Section 5 as it did? Largely because it wanted to give the FTC the flexibility to deal with new and unexpected forms of wrongdoing as they arise. As one congressional report concluded, “it is impossible to frame definitions which embrace all unfair practices” in advance. “The purpose of Congress,” wrote Justice Louis Brandeis (who had a hand in drafting the law), was to ensure that the FTC can “prevent” an emergent “unfair method” from taking hold as a “general practice.”
Noncompete agreements are not some startling innovation. They’ve been around—and allowed—for hundreds of years. If Congress simply wanted to ensure that the FTC can nip new threats to competition in the bud, the NPRM is not a proper use of the FTC’s power under Section 5.
In any event, what Congress almost certainly did not intend was to hand the FTC the capacity (as Chair Lina Khan would have it) to “shape the distribution of power and opportunity across our economy.” The FTC’s commissioners are not elected, and they cannot be removed (absent misconduct) by the president. They lack the democratic legitimacy or political accountability to restructure the economy.
All the same, nothing about Section 5 suggests that Congress gave the agency such awesome power. What leeway Chevron might give here, common sense takes away. The more the FTC “seeks to break new ground by enjoining otherwise legitimate practices,” a federal court of appeals once declared, “the closer must be our scrutiny upon judicial review.” It falls to the judiciary to ensure that the agency does not “undu[ly] … interfere” with “our country’s competitive system.”
We have come full circle. Article I and the “major questions” principle tell us that the FTC cannot use four words in Section 5 of the FTC Act to issue a rule that disrupts contractual relations, tramples federalism, and shifts around many billions of dollars in wealth. And if we march through the Chevron analysis anyway, we find that, even at Chevron step two, the statute still can’t bear the weight. Chevron deference is not a license for the FTC to ignore the separation of powers and micromanage the economy.