On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking essentially banning non-compete clauses and categorizing them as unfair methods of competition. Non-compete clauses serve to protect a business’s trade secrets and other confidential information, which makes the adoption of such a rule concerning for all US businesses. Our previous article addressed how the FTC’s proposed ban on non-compete agreements could affect your business. This article summarizes some of the legal challenges the proposed rule will likely face.

The FTC voted 3-1 in favor of this proposed rule, with Commissioner Christine Wilson the lone dissenter, who noted that the commission’s rulemaking authority for non-compete clauses is vulnerable to several legal challenges. The commission majority argued that non-compete clauses are exploitative and coercive, thus making the clauses unfair.

Some of the legal challenges Wilson addressed include the following: (1) the commission lacks authority to engage in “unfair methods of competition” rulemaking; (2) the major questions doctrine applies, and the commission lacks clear congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine.

Authority to Engage in Unfair Methods of Competition Rulemaking

Under Section 6(g) of the FTC Act, the commission is authorized to “make rules and regulations for the purpose of carrying out the provisions of the subchapter.” The FTC has consumer protection rulemaking authority under the Magnuson-Moss Act; however, there is a lack of clarity as to whether it can engage in substantive competition rulemaking since the act expressly excluded rulemaking for unfair methods of competition. This lack of clarity will be a source of challenges to the proposed rule.

Major Questions Doctrine

The major questions doctrine has been applied when questioning the authority given to an agency as well as whether Congress meant to confer the power the agency has asserted. The FTC’s action will trigger the application of the doctrine if the agency claims to (1) resolve a matter of political significance, (2) regulate a significant portion of the American economy, or (3) intrude in an area that is the particular domain of state law. Wilson argues that the proposed rule banning non-compete provisions implicates all these claims: Congress has already rejected bills proposing to ban non-compete clauses; approximately 30 million workers are bound by non-compete clauses; and regulation of non-compete clauses has historically been in the domain of state law, with 47 states permitting non-compete clauses in some capacity.

If a court determines that the non-compete clause rule is a major question, the FTC would have to show clear congressional authorization to impose a regulation banning non-compete clauses (which, as addressed previously, is not clearly authorized).

Non-Delegation Doctrine

The non-delegation doctrine proposes that Congress cannot delegate its legislative power to another branch of government, including agencies. While the Supreme Court has approved congressional authorization for the FTC to prohibit unfair methods of competition, it was under the guise of the commission acting as a quasi-judicial body rather than the commission using legislative power to promote fair competition.

It is not clear that prohibiting non-compete agreements will benefit labor markets or have a positive impact on competition. There are additional legal hurdles that the FTC may face as it attempts to regulate competition, all of which cannot be addressed in this article. The public is encouraged to voice their concerns during the comment period of this proposed rule, which ends March 20.

Our trade secrets, unfair competition, and non-compete team handles complex litigation involving allegations of trade secret theft, unfair competition, computer fraud and abuse, non-competition agreements, and breaches of fiduciary duties for clients throughout the United States in a wide range of industries. If you have specific questions on how this proposed rule may affect your company, please contact Joe Lavigne, Tom Hubert, or P.J. Kee.