Jonathan Masur and Eric Posner Write About the Legality of the FTC Noncompete Ban

The FTC Noncompete Ban Is Legal

Many commentators think that the Federal Trade Commission’s rule banning noncompetes is illegal, though they have difficulty agreeing why, or even articulating why. The mostly unarticulated assumption seems to be that the Supreme Court or conservative lower courts will simply not allow the FTC to regulate and will gin up some rationalization in due course. As one commentator put it, “my rationale is that any agency rulemaking that’s a big enough deal to make the front page of the New York Times is likely going to be invalidated by the courts.” We can’t read the minds of the judges. But a reminder of some familiar principles of administrative law does not seem out of place.

The FTC is an administrative agency, and for the time being at least, it is settled law in the United States that Congress can give agencies the authority to make policy by issuing regulations, and that Courts should defer to those policy judgments as long as procedural requirements are satisfied and the judgments themselves are not arbitrary. Thousands of rules, from pollution regulations issued by the Environmental Protection Agency to corporate disclosure requirements imposed by the Securities and Exchange Commission, rest on this legal foundation. Not even the current right-leaning Supreme Court majority shows an inclination to abolish our system of administrative regulation, even if it routinely trims it along the edges.

The FTC’s statutory authority to issue the noncompete rule is not an edge case. Section 5 of the FTC Act of 1914 authorizes the FTC to prevent firms from engaging in “unfair methods of competition.” Congress used this phrase, which was novel at the time and deliberately broad, to encompass anticompetitive behavior that was both already covered by the antitrust laws (which prohibited firms from using “restraints of trade” and from “monopoliz[ing]” markets) as then interpreted by the courts and that reached beyond them. Like countless other regulatory agencies before and since, the FTC was entrusted with authority to interpret the law, effectively to make policy within the law’s ambit. As a noncompete is just a restraint of trade that restricts competition, the statute plainly authorizes the FTC to issue a rule regulating noncompetes.

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