FTC’s UMC Rulemaking Authority: A Break from Tradition and an Embrace of Ambiguity
The Federal Trade Commission Act grants the FTC broad authority to investigate unfair methods of competition and unfair and deceptive acts or practices across large swaths of the American economy. Section 5 of the Act specifically gives the Commission the power to bring enforcement actions to prevent “unfair methods of competition,” and Section 6 details the FTC’s investigative powers to collect confidential business information and conduct industry studies.
Historically, the FTC has used its UMC powers almost exclusively to undertake case-by-case administrative or federal court adjudication of competition cases. This led to significant FTC victories and shaped the development of antitrust law by creating citable precedent in key areas. For example, the FTC’s successes include:
- Challenges to hospital mergers in Evanston Northwestern Healthcare and Promedica Health System, in which the FTC secured a conduct remedy and divestiture;
- The Commission’s own decision in McWane, upheld by the Eleventh Circuit, which is widely cited in exclusive dealing cases; and
- Several successful challenges of already-consummated acquisitions, such as in Chicago Bridge & Iron Co. and Polypore International.
In addition to these successes in adjudication, the FTC has used its investigative powers to collect business information and conduct industry studies, helping guide Congress and courts in their actions to protect competition in a variety of fields. For example, the FTC’s report on competition and consumer protection issues surrounding the direct shipment of wine was instrumental in the Supreme Court decision striking down state laws that discriminated against out-of-state wineries.
This focus on adjudication and investigation is not random: it is a natural outgrowth of the text of the FTC Act itself, which sets out a comprehensive adjudicative and investigatory framework.
In contrast to the current text, the original FTC Act contained only one sentence describing the agency’s ability to make rules, buried among provisions authorizing investigations into foreign trade conditions and publications of reports to Congress. As originally enacted, Section 6(g) provided that the FTC would have authority “[f]rom time to time [to] classify corporations and . . . to make rules and regulations for the purpose of carrying out the provisions of this [Act].”
Although Section 5 provides a detailed administrative scheme for the enforcement of cease-and-desist orders and judicial review of agency decisions, the FTC Act fails to provide any sanctions for violations of rules promulgated under Section 6 or to otherwise specify that such rules would carry the force of law. This minimal delegation of power arguably conferred the right to issue procedural but not substantive rules. Supporting this conclusion—and as detailed in previous articles—modern courts reject the type of statutory analysis needed to conclude that the FTC Act authorizes substantive UMC rulemaking.
Despite this backdrop, FTC leadership under the Biden Administration asserted that the FTC possesses and should actively utilize rulemaking authority under Section 6(g) of the FTC Act to devise and adopt substantive rules proscribing unfair methods of competition. Now-former FTC Chair Lina Khan set out to employ this “full set of tools and authorities” during her tenure, culminating in the adoption of an April 2024 rule that would have banned most noncompete agreements in employment contracts in the United States. A closer examination of the noncompete rule and litigation around it provides a window into the arguments on both sides of the UMC rulemaking debate.
The FTC’s Noncompete Rule and Ryan, LLC v. FTC
Employer/employee noncompete agreements are restrictive covenants that prohibit an employee from competing against his or her employer, typically for a certain period of time, geographic scope, and/or area of practice. These agreements are in widespread use throughout the U.S. economy, estimated to impact one in five American workers.
The FTC’s Noncompete Rule.
As early as 2018, the FTC took an interest in noncompete agreements, initiating public hearings on the topic, inviting public comment, and eventually launching several investigations. The Commission considered whether such agreements constitute unfair methods of competition.
In a 2021 executive order, President Biden went further, directing the FTC “to exercise [its] statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” These efforts culminated in the FTC’s April 2024 adoption of a final rule that would have banned nearly all noncompete agreements in employment contracts in the U.S. and preempted all state laws that did not provide the same or stronger prohibitions than the rule.
Specifically, the noncompete rule would have:
- prohibited employers from entering into post-employment noncompetes with any worker (including, e.g. employees and independent contractors);
- made existing noncompete agreements unenforceable, except with “senior executives” making over $151,164 annually and with a policy-making position for the business; and
- required employers to send a notice by September 4, 2024, to all current and former workers subject to a covered noncompete agreement informing them that their noncompete agreement will not be enforced against them.
The rule was immediately challenged in federal court in several jurisdictions.
Ryan, LLC v. FTC.
In one such case out of the U.S. District Court for the Northern District of Texas, Judge Ada Brown issued a decision on August 20, 2024, setting aside the noncompete rule on the grounds that it was both (i) issued outside of the FTC’s rulemaking authority, and (ii) “arbitrary and capricious” because it is unreasonably overbroad without reasonable explanation. In finding that the FTC exceeded its rulemaking authority, the court concluded that the “text, structure, and history” of the FTC Act indicate that Congress did not explicitly give the FTC substantive rulemaking authority regarding unfair methods of competition under Section 6(g), under which the FTC claims its authority for promulgating the noncompete rule. According to the court, this conclusion was supported by:
- the plain language of Section 6(g), which “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition”;
- the lack of a statutory penalty for violating rules promulgated under Section 6(g), which the court concluded also demonstrated its lack of substantive rulemaking power;
- the structure of the statute as a whole—and, in particular, the location of Section 6(g), which is the seventh in a list of twelve almost entirely investigative powers and which fails to mention Section 5 or any other substantive authority from where such substantive rulemaking power would stem; and
- the history of the FTC Act and subsequent amendments, in which the FTC explicitly disclaimed substantive rulemaking authority (except for one brief period) and in which Congress vested the FTC, through the Magnuson-Moss Act, with the power to promulgate substantive rules regarding only unfair or deceptive acts or practices, not unfair methods of competition.
Based on this, the court concluded that Section 6(g) is a “housekeeping statute,” and accordingly, the FTC had exceeded its statutory authority in promulgating the noncompete rule.
Next, the court found the noncompete rule to be “arbitrary and capricious,” holding that the FTC’s one-size-fits-all approach was not supported by the record. According to the court, the record demonstrated that states have taken different approaches to determining enforceability of covenants not to compete based on specific factual situations, and that no state has enacted a noncompete rule as broad as the FTC’s rule. The court found that the FTC provided no evidence as to why it chose to impose such a sweeping prohibition. The court also took issue with the FTC’s apparent failure to sufficiently address alternatives to issuing the rule or to consider the substantial body of evidence supporting the positive benefits of noncompete agreements.
Following the district court decision, the FTC appealed to the Fifth Circuit. In its opening brief, submitted on January 2, 2025, the FTC called the district court’s view of the FTC’s authority “cramped” and argued that the statutory context and history of the FTC Act “confirm” that Congress gave the FTC the authority to promulgate binding, substantive rules.
Though drawing the opposite conclusion as the district court, the FTC too argued that its interpretation of the FTC Act was supported by the plain language of the statute as well as “every other relevant indicator of statutory meaning.” Specifically, the FTC highlighted:
- the plain language of the statute, including the language empowering the FTC to “make rules and regulations for the purpose of carrying out” the Act and the directive that the FTC “prevent” the use of unfair methods of competition which the FTC argued “inherently contemplates forward-looking rulemaking”;
- “decades of Supreme Court precedent construing similar statutory language to confer similar authority,” which the FTC argued created a long line of precedent confirming that statutory language identical or nearly identical to Section 6(g) authorizes agencies to promulgate substantive legislative rules; and
- the 1973 decision, National Petroleum Refiners Association v. FTC, out of the D.C. Circuit, upholding the FTC’s ability to promulgate substantive rules as well as “confirm[ation]” of the authority by Congress in ratifying subsequent amendments to the FTC Act, including the Magnuson-Moss Act.
As to the district court’s determination that the noncompete rule was arbitrary and capricious, the FTC detailed the steps it had taken in an “exhaustive analysis of the economic literature and comments submitted during the rulemaking process” that led to its reasonable conclusion that noncompete agreements: (i) are facially restrictive and exclusionary; (ii) are exploitative and coercive with respect to workers other than senior executives; and (iii) tend to (and in actual effect do) negatively affect competitive conditions in labor, product, and service markets.
The FTC has also appealed a negative decision out of the United States District Court for the Middle District of Florida. A third suit in Pennsylvania was voluntarily dismissed by the plaintiff after the Texas court’s August 2024 ruling striking down the noncompete rule.
Impact of Loper Bright on UMC Rulemaking
Against this backdrop, the Supreme Court has in recent years issued a series of decisions curtailing judicial deference for agency (including FTC) interpretations of the scope of their authority, culminating in the June 2024 decision in Loper Bright Enterprises v. Raimondo.
For the four decades prior to Loper Bright and after Chevron v. Natural Resources Defense Council, courts were required to employ a two-step framework to interpret statutes administered by federal agencies. First, a reviewing court would determine “whether Congress ha[d] directly spoken to the precise question at issue.” If the court determined that “the statute [was] silent or ambiguous with respect to the specific issue” at hand, the court would then, in Chevron’s second step, defer to the agency’s interpretation if it was “based on a permissible construction of the statute.”
The Supreme Court in Loper Bright overruled Chevron, and held that courts “must exercise their independent judgment” in deciding whether an agency’s action is within its statutory authority. With Chief Justice Roberts writing for a six-Justice majority, the Court explained that the deference that Chevron required of courts reviewing agency action simply could not be squared with either the Administrative Procedure Act (“APA”), or—more fundamentally—with the “time honored” and “elemental proposition reflected by judicial practice dating back to Marbury [v. Madison]: that courts decide legal questions by applying their own judgment.”
Looking back through the country’s history, the majority explained that the Framers envisioned that the judiciary would be the final authority on the interpretation of the laws while giving “due respect” to executive branch interpretations of federal statutes. According to the Court, “ ‘Respect,’ though, was just that. The views of the Executive Branch could inform the judgment of the Judiciary, but did not supersede it.” While the New Deal brought a rapid expansion of the administrative process, U.S. courts continued to adhere to these founding principles regarding their power and did not extend deference to agency resolutions of questions of law.
Then, in 1946, Congress further enshrined the principle that courts, not agencies, will decide all questions of law, by enacting the APA “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.” Specifically, the Court emphasized Section 706 of the APA, which:
- directs that “[t]o the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action”; and
- requires courts to “hold unlawful and set aside agency action, findings, and conclusions found to be . . . not in accordance with law.”
The plain language of the APA—according to the Court—thus requires that courts not agencies, decide “all relevant questions of law” arising on review of agency action, even those involving ambiguous laws. Chevron, then, “triggered a marked departure from the traditional approach” that “cannot be reconciled” with the text of the APA nor the centuries of precedent before it. Further, the presumption in Chevron that “statutory ambiguities are implicit delegations to agencies” was “misguided” because courts, not agencies, have special competence in resolving statutory ambiguities.
Examining the legacy of Chevron, the Court then noted a substantial erosion of the doctrine after four decades of “pruning,” including that the Supreme Court had not deferred to an agency’s interpretation under Chevron in nearly ten years (since 2016). The Court also found stare decisis considerations were not determinative because the Chevron doctrine had proved both misguided and unworkable. Ultimately, the Court concluded that “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires . . . . [C]ourts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”
The Court then remanded the case for reconsideration because the court of appeals had improperly relied on Chevron in reaching its decision. The Court noted, however, that it was not “call[ing] into question” earlier cases that relied on the Chevron framework, noting those cases remain good law and “subject to statutory stare decisis despite our change in interpretive methodology.” While this maintains some stability for existing administrative law, the ultimate impact of the Loper Bright decision is likely only to become clear as challenges to regulations make their way to the courts over the next several years.
In the antitrust context specifically, as noted previously, the FTC traditionally has acted primarily through enforcement actions, not rulemaking, as had the other U.S. antitrust enforcement agency, the Antitrust Division of the DOJ. While both DOJ and FTC guidelines and policy statements have been viewed by courts as persuasive, they were not entitled to Chevron deference. In stark contrast, however, proponents of UMC rulemaking had argued the FTC’s competition rulemaking authority was entitled to Chevron deference. Loper Bright then will likely have the greatest impact in the antitrust context on the FTC’s rulemaking activities.
On the other hand, Chevron was becoming increasingly irrelevant given the raft of Supreme Court decisions denying wide latitude to administrative agency powers. It was doubtful the Supreme Court would have seen broad UMC rulemaking as “permissible,” even if Chevron still stood. Loper Bright makes that even less likely.
Conclusion
Loper Bright has already been relied upon in setting aside the noncompete ban. Although the court in Ryan, LLC v. FTC did not discuss Loper Bright or its implications in detail, it did cite the decision several times in concluding that the FTC exceeded its statutory authority in promulgating the rule. While perhaps not the first, the Loper Bright decision appears to be yet another nail in the coffin of FTC’s UMC rulemaking.
