Since becoming chair of the Federal Trade Commission three years ago, Lina Khan has sought doggedly to politicize antitrust law. For decades, regulators and judges have adhered to the consumer-welfare standard, under which antitrust ensures merely that firms pursue low prices, high product quality, and innovation. Khan, by contrast, sees antitrust as a vehicle for “shap[ing] the distribution of power and opportunity across our economy.”

Generally, Khan’s strength has not matched her ambition. In its long-awaited lawsuit against Amazon, for instance, the FTC avoided the sort of pathbreaking arguments that Khan offered in her noted law review article against the company. To have any prospect of success in court, the commission had to contend that Amazon is liable under established antitrust principles.

Recently, though, Khan’s FTC did something quite different. The commission released an order claiming the power to create antitrust rules under its enabling statute, the Federal Trade Commission Act of 1914. This is not another effort to bend or stretch antitrust law as it exists; it’s a bid to rebuild it from the ground up. This is Khan’s most aggressive—and dangerous—move as chair.

Section 5 of the FTC Act directs the commission to prevent businesses from using “unfair methods of competition.” This basically grants it authority to enforce the nation’s antitrust laws—primarily the Sherman Antitrust Act of 1890. Section 5 explains in detail how such enforcement should work. To prosecute anticompetitive behavior, the commission must issue a complaint, hold a hearing, make findings of fact, and then issue a cease-and-desist order.

Last month, the FTC declared that nearly all employee noncompete agreements constitute an unfair method of competition under Section 5. Rather than use the Section 5 enforcement mechanism to target a specific company’s contracts, the commission simply decreed that about 30 million noncompetes are an extinct species. To justify this sweeping ban, the commission points to Section 6 of the FTC Act, which empowers the agency to conduct investigations and compile reports. Buried in that provision, at Section 6(g), is a half-sentence granting the power to issue rules. The FTC asserts that this line about rulemaking, deep in the FTC Act’s investigations section (Section 6), can be used to make rules regarding a key element—the meaning of “unfair methods of competition”—of the Act’s enforcement section (Section 5).

This claim runs into numerous problems, including serious constitutional ones. Several lawsuits against the order have already been filed, and the dispute is likely to go to the Supreme Court. The justices could conclude that the FTC is the latest agency that, by seeking to address significant policy matters without Congress’s permission, has run afoul of the major-questions doctrine. The Court might even find that Congress, in letting the FTC define the nebulous term “unfair,” has violated its constitutional duty to exercise “all legislative powers” itself.

However things turn out, the heart of the problem is simple: the FTC is invoking a statutory prerogative that doesn’t exist. It is “discovering” authority through a cynical and ahistorical reading of the FTC Act.

In 1911, the Supreme Court blessed the government’s effort to break up Standard Oil. The ruling sparked a debate over what the Sherman Act means and how it should be enforced. After winning the 1912 presidential election, Woodrow Wilson asked Congress for two reforms: the passage of a “more explicit legislative definition of the policy and meaning of the existing antitrust law,” and the creation of an “interstate trade commission” to serve as an “instrument of information and publicity.”

The second goal—standing up an investigative agency—moved forward with the April 1914 introduction of a bill in the House of Representatives. The bill envisioned an interstate trade commission that could investigate antitrust violations, publish reports, and make recommendations. The bill contained no enforcement power.

Meantime, the first goal—fleshing out the meaning of antitrust law—took an unexpected turn. George Rublee, a close associate of Louis Brandeis (namesake of the “neo-Brandeisian” school of antitrust, to which Khan belongs), became convinced that no statute could adequately define the many forms of unfair competition. He got a bill introduced in the Senate for the creation of a “Federal Trade Commission” that could hand down orders barring “unfair methods of competition” on a case-by-case basis.

The House and Senate bills were ultimately rolled together into the FTC Act of 1914. The House bill (investigative agency) survives as Section 6, the Senate bill (enforcement agency) as Section 5.

So it makes no sense to say, as Khan’s FTC does, that the rulemaking clause in Section 6 is a vessel for making rules about unfair methods of competition under Section 5. Section 6(g) allows the commission to set housekeeping rules for conducting Section 6 investigations. It has nothing whatever to do with the commission’s Section 5 enforcement power. Everything the FTC needs to know about that enforcement power can be found (no surprise) in Section 5, which requires the commission to engage in individual adjudications and to afford each respondent extensive due process.

For many years after the FTC Act was passed, the FTC remained well aware of the distinction between Section 5 and Section 6, and of the limits on its power to regulate unfair methods of competition. In 1922, for example, the commission acknowledged that it may not “issue . . . regulations unconnected with any proceeding before it.” Only in the 1960s did the agency claim to find a substantive rulemaking power hiding in Section 6(g). In 1973, the U.S. Court of Appeals for the D.C. Circuit acceded to this revelation, in a shambolic opinion that ignored the FTC Act’s text in favor of its supposed “purpose.” A few years later, Congress rebuked the FTC for repeated abuses of power (it even cut off funding for a few days). Chastened, the agency laid down its freshly minted competition rulemaking authority. There it rested, until last month.

The FTC has long policed unfair methods of competition in discrete cases. What’s the big deal, one might ask, about letting it police them through rules? The stakes are immense.

A few types of clearly anticompetitive behavior aside (price fixing, for example), antitrust law involves careful analysis of the facts of a given situation. Under this “rule of reason” approach, antitrust regulators must be constrained and disciplined. They may not go around banning entire business practices at a stroke. They must show the anticompetitive harm of this manufacturer’s resale price maintenance agreements with these retailers in this market for widgets.

Lina Khan’s FTC doesn’t want to be constrained or disciplined. It defends its rule against noncompete agreements on the ground that they’re anticompetitive in the aggregate. Some noncompetes are likely pro-competitive in effect, enabling firms, say, to invest more in training employees who can’t promptly take their new skills elsewhere. But by citing the practice’s alleged overall or “structural” harm to the economy, the FTC argues, it can sweep all noncompetes aside without troubling over such details.

It’s certainly true that many noncompete clauses don’t look pro-competitive. It’s hard to see why fast-food chains should be deploying them, for example. But this is exactly why they’re the subject of the FTC’s test case. Noncompete rulemaking is a stalking horse for antitrust rulemaking writ large. If the commission succeeds in using Section 6(g) to obliterate the rule of reason for noncompetes, it will next try using it to eradicate the consumer-welfare standard, root and branch. Indeed, the commission has already stated its desire to treat as unfair methods of competition any practice it deems “exploitative,” regardless of whether it can show market power or harm to consumers.

At first blush, the dispute over Section 6(g) of the FTC Act might seem arcane or trivial. It is not. Will antitrust law remain a precise instrument for protecting competition? Or will it instead become a vague, all-purpose tool for clubbing big firms and promoting assorted progressive causes? That is the issue, and it is paramount.

Photo by Kevin Dietsch/Getty Images


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