Header: Explain why a Texas federal court decision which throws out an FTC regulation, is good news for the legal efforts to derail FDA control of LDTs.
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Update: See an August 26 NYT article on the Fifth Circuit (LA/TX) and the conservative judges in Texas that feed into it.
Update: See an article where a Texas judge vacates an HHS ruling against hospitals web-tracking visitors; "promulgated in clear excess of HHS's authority under HIPAA;" here.
- The latter, by Judge Pittman, is a wild read citing everyone from Thomas Jefferson to the Book of Luke, and affirming that sending the ACLA and AMP cases to Texas (in 2 different districts) is like throwing a T-bone steak to a den of hungry tigers.
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On August 20, 2024, a Trump-appointed judge in Texas (Ada Brown), struck down a recent Biden FTC regulation that (1) banned noncompete agreements nationally, and (2) disempowered them retroactively as well.
Here's the judge's 24-page ruling. Here's the WSJ article explaining it.
Traditionally, non-competes have been creatures of state law. They're generally not valid in California, and generally OK in Texas (WSJ).
Paragraphs the ACLA and AMP Would Love to See
My copies of both documents are heavily highlighted in yellow.
First, the judge agrees with plaintiffs that the FDA lacks statutory authority to make substantive regulations. Indeed, it has rarely done so (although a few in the 1960s survived court challenges then.) As WSJ summarizes, "The commission's authority to police unfair methods of competition, couldn't be used to issue [regulations] banning an entire category of conduct." The judge wrote, an agency does what it is "told [to do] by Congress, not [what] the agency thinks it should do."
On separate grounds, the judge ruled the FTC ban was arbitrary and capricious "because it was unreasonably overbroad."
Per WSJ ,the judge also wrote, that FTC can limit "deceptive practices that mislead consumers," not "how firms compete" in general (outside of deceptive consumer practices.)
The scope of the ruling is nationwide, not just Texas, and fits a "conservative Supreme Court that has taken a dim view of government agencies invoking new regulatory powers" [WSJ].
As I've remarked on the ACLA FDA case, a change in administration could be highly impactful. DJT is going to poll noticeably better with the endorsement of RFK Jr (who has about 5% of voters behind him). A second DJT administration might elect not to appeal a [possible] FDA LDT loss and its injunction blocking the FDA LDT rule.
The Judge's Ruling
The ruling contains numerous conclusions or even paragraphs that would fit into a negative ruling against the FDA LDT regulation. In particular, the Texas judge writes, "The Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits [of non-compete agreements], and disregards the substantial body of evidence supprting these agreements." A judge could use the same sentences to say she agrees with arguments in the ACLA and the AMP cases against the FDA ruling. And the judge notes there is no question that judges can set aide regulations; they have explicit authority to do so in the Administrative Procedures Act (quoting that "APA directs the reviewing court to hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary and capricious.")
And - The appeals court for Texas (the Fifth Circuit) takes the position that such APA-based bans have "nationwide effect, are not party restricted, and affect persons in all judicial districts equally."
There's another fit with ACLA-AMP - obviously, ACLA and AMP don't want the FDA LDT regulation set aside solely in Texas.
Judge and Plain Meaning
The judge notes that the FTC's regulatory authority - if it exists - is buried in a reading of a phrase deep inside a lengthy section of statute about investigatory powers (holding hearings, etc). She writes that "the appropriate starting point when interpreting any statute is its plain meaning." Similar, the ACLA and AMP cases that the plain meaning of the words "a medical device" in 1976 did not include a complex multi-day laboratory procedure across many people and many independent machines.
For example, it seems unlikely to me that FDA can find a 1976 dictionary would refer to laboratory procedures as "medical device.s" Or that FDA can find a 1976 university course in "medical devices" whose syllabus or textbook including laboratory developed test operations as a chapter right alongside "medical devices" like pacemakers, heart valves, prosthetics, and glucose meters.
In the recent Texas federal court case presided over by Judge Ada Brown, the court ruled against the Federal Trade Commission (FTC) concerning its "Non-Compete Rule." This rule, introduced by the FTC, sought to ban most non-compete agreements nationwide and required existing agreements to be rescinded.
Case Background and Parties Involved
The case was brought forward by the plaintiff Ryan, LLC, along with several prominent business organizations, including the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce (collectively referred to as "Plaintiffs"). The plaintiffs challenged the FTC's authority to enforce this new regulation, arguing that it exceeded the statutory powers granted to the FTC by Congress.
Key Legal Issues
FTC's Statutory Authority: The central issue in this case was whether the FTC had the statutory authority under the Federal Trade Commission Act (FTC Act) to promulgate the Non-Compete Rule. The FTC argued that its authority to issue such a rule derived from Section 6(g) of the FTC Act, which allows the Commission to "make rules and regulations for the purpose of carrying out the provisions of this subchapter."
Arbitrary and Capricious Standard: The plaintiffs also argued that the FTC's rule was arbitrary and capricious. They contended that the FTC failed to adequately consider the economic impact and benefits of non-compete agreements and that the rule was overly broad without sufficient justification.
Court's Findings
Exceeding Statutory Authority: Judge Brown ruled that the FTC exceeded its statutory authority in issuing the Non-Compete Rule. The court emphasized that while the FTC Act grants the FTC certain powers, including the prevention of unfair methods of competition, it does not explicitly authorize the creation of substantive rules such as the Non-Compete Rule. The court noted that Section 6(g) of the FTC Act, which the FTC cited as the basis for its authority, primarily concerns procedural and housekeeping matters rather than substantive rulemaking.
Arbitrary and Capricious: The court also found that the FTC's rule was arbitrary and capricious. The judge noted that the rule was based on flawed empirical evidence and failed to consider important benefits of non-compete agreements, such as protecting trade secrets and fostering business investments. Additionally, the court criticized the FTC for not adequately exploring less restrictive alternatives to a complete ban on non-compete agreements.
Nationwide Impact: The court's ruling emphasized that the decision to set aside the FTC's rule would have nationwide implications. The court referenced the Administrative Procedures Act (APA), which directs courts to hold unlawful and set aside agency actions that exceed statutory authority or are arbitrary and capricious. This ruling, therefore, effectively nullifies the FTC's Non-Compete Rule across the entire United States.
Conclusion
Judge Ada Brown's decision to strike down the FTC's Non-Compete Rule highlights significant limitations on the regulatory powers of federal agencies like the FTC. By ruling that the FTC lacked the authority to issue such a sweeping regulation and that the rule was arbitrary and capricious, the court reinforced the principle that federal agencies must operate within the bounds of the authority explicitly granted to them by Congress. This ruling is particularly relevant in the broader context of ongoing legal challenges to other federal agency regulations, including those concerning Laboratory Developed Tests (LDTs), as it underscores the judiciary's role in checking potential overreach by administrative bodies.
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It seems the judge doesn't really answer clearly enough why black and white authority to issue "regulations" carrying out the statute, doesn't include this type of regulation, which FTC argues is merely a regulation to carry out its known scope of authority.
The judge has to deal with the black letter of statute giving authority to make regulations to carry out FTCs scope.
You're right that the judge in this case had to navigate the tension between the FTC's statutory authority to issue regulations and the specific challenge to the Non-Compete Rule. While the statute does give the FTC the authority to issue regulations, the judge found that this authority doesn't extend as far as the FTC claimed.
Key Points in the Judge's Reasoning:
Scope of Regulatory Authority (Section 6(g)):
- The judge acknowledged that the FTC has statutory authority under Section 6(g) of the FTC Act to "make rules and regulations for the purpose of carrying out the provisions of this subchapter." However, she concluded that this authority is limited to procedural or "housekeeping" rules rather than substantive rules like the Non-Compete Rule.
- The court argued that Section 6(g) is primarily concerned with the administrative functions necessary to enforce the FTC Act, such as classifying corporations or setting procedures for hearings, rather than creating new substantive obligations that directly impact broad sectors of the economy.
Lack of Historical Precedent and Penalty Provisions:
- The judge pointed out that for the first several decades of its existence, the FTC did not assert that it had substantive rulemaking authority under Section 6(g). It wasn’t until 1962 that the FTC began to issue substantive rules, and even then, the court noted that this was not consistent with earlier interpretations of the agency’s power.
- Importantly, the court highlighted the absence of statutory penalties for violating rules made under Section 6(g), which is a hallmark of substantive rulemaking authority. In contrast, when Congress intends for an agency to have substantive rulemaking power, it typically includes explicit penalties for violations, underscoring that the rules have the force of law.
Textual and Structural Interpretation:
- The judge relied heavily on a textual and structural analysis of the FTC Act, emphasizing that substantive rulemaking powers are not mentioned explicitly in Section 6(g) and are instead focused on in other sections like Section 18, which deals with unfair or deceptive acts or practices.
- The court reasoned that the placement and wording of Section 6(g) within the broader statutory scheme suggest it was not intended to confer broad substantive rulemaking authority. The judge saw Section 6(g) as a provision meant to support the procedural and investigatory functions of the FTC, not to enable the agency to create entirely new categories of prohibited conduct like the Non-Compete Rule.
Judicial Precedent and Congressional Intent:
- The ruling leaned on judicial precedent that emphasizes the need for clear congressional authorization for substantive rulemaking. The court highlighted that the judiciary remains the final authority on statutory construction and that agencies cannot expand their powers beyond what Congress has explicitly provided.
- The judge also referenced amendments to the FTC Act over time, noting that when Congress wanted to grant the FTC substantive rulemaking authority (e.g., in the context of consumer protection under the Magnuson-Moss Act), it did so explicitly and included specific procedural safeguards, which were absent in Section 6(g).
Conclusion:
The judge’s reasoning centers on the interpretation that while the FTC does have authority to issue regulations, the kind of substantive, economy-wide rule represented by the Non-Compete Rule exceeds what Congress intended when it granted the FTC the authority to make rules under Section 6(g). The ruling suggests that the authority to make rules “to carry out the provisions of this subchapter” was intended more for procedural and administrative regulations rather than for broad, substantive changes to competition law, which Congress did not explicitly authorize the FTC to undertake.
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Yes, but the judge also quotes some regulations of the FTC that withstood challenge in the 1960s at the appellate level - though in a different circuit. She notes those "wins" for FTC regulations in court, but seems to forget about them thereafter.
Indeed, the judge does mention earlier instances where the FTC successfully defended its rulemaking authority in the 1960s, particularly in the National Petroleum Refiners Association v. FTC case. In that case, the D.C. Circuit Court upheld the FTC's authority to promulgate substantive rules under Section 6(g). This precedent was significant because it recognized the FTC's ability to issue binding rules, even in the absence of explicit congressional authorization for substantive rulemaking.
The Judge's Treatment of the 1960s Precedent:
Acknowledgment of Precedent:
- The judge does acknowledge the FTC's earlier success in defending its substantive rulemaking authority in the National Petroleum case, where the D.C. Circuit upheld the agency's power under Section 6(g) to issue Trade Regulation Rules. This case was a key moment in the FTC's history, as it marked the first time the agency asserted its authority to create substantive rules with the force of law.
Distinguishing the Current Case:
- Despite this precedent, the judge distinguishes the present case from those earlier rulings. She points out that while the National Petroleum decision supported the FTC's rulemaking authority, it did so under a specific set of circumstances and within a different legal and regulatory context.
- The judge emphasizes that the statutory and regulatory landscape has evolved since the 1960s, particularly with the passage of the Magnuson-Moss Warranty—Federal Trade Commission Improvement Act in 1975, which explicitly granted the FTC rulemaking power in certain areas but also imposed procedural safeguards and limitations.
Historical Context and Congressional Intent:
- The judge argues that the National Petroleum decision, while valid in its time, does not necessarily reflect the broader intent of Congress regarding the FTC's authority under Section 6(g). She suggests that Congress's subsequent actions, including the Magnuson-Moss Act, indicate a more limited view of the FTC's rulemaking power.
- The judge also notes that the FTC did not consistently assert substantive rulemaking authority after National Petroleum, which suggests some uncertainty or reluctance on the part of the agency to fully embrace or test this authority in other contexts.
Downplaying the 1960s Wins:
- After acknowledging these earlier wins, the judge seems to downplay their significance by focusing on the lack of substantive rulemaking by the FTC in the decades that followed. She argues that the FTC's lack of action in this area for many years, coupled with subsequent congressional amendments that specifically addressed rulemaking authority, undermines the applicability of the 1960s precedent to the present case.
- The judge's decision to emphasize more recent legal and legislative developments suggests a preference for a more constrained interpretation of the FTC's authority, one that aligns with the view that substantive rulemaking requires explicit and unambiguous congressional authorization.
Conclusion:
While the judge does acknowledge the FTC's earlier legal victories regarding its rulemaking authority, she ultimately downplays their relevance to the current case. Her reasoning is that the legal and regulatory context has changed since those decisions, and that more recent developments, including the Magnuson-Moss Act and the FTC's own historical behavior, suggest a more limited scope for the agency's substantive rulemaking authority under Section 6(g). In doing so, the judge appears to prioritize a more recent and restrictive interpretation of the FTC's powers, which aligns with her overall conclusion that the Non-Compete Rule exceeds the FTC's statutory authority.
