In light of the FTC’s vote yesterday to adopt a rule banning non-compete agreements, readers might be interested to see what the Attorney General’s Committee on Administrative Procedure said about FTC rulemaking in its 1940 monograph. The Committee prepared 26 monographs examining the actual practices and procedures of administrative agencies, and this research informed a report to Congress and legislative proposals that ultimately became the Administrative Procedure Act. The FTC monograph is on the shorter side: 34 pages (40 including appendices), fewer than 5 pages of which address rulemaking.

The FTC invokes its authority under § 5 and § 6(g) of the Federal Trade Commission Act to issue this rule. The FTC interprets § 6(g) as the source of its rulemaking authority. That provision is codified at 15 U.S.C. § 46(g), which provides that “[t]he Commission shall also have the power . . . to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” This language has not changed since 1940, when the Attorney General’s Committee published its monograph on the FTC.

Section 6(g) is first mentioned at the end of the first paragraph (on page 3) in the part of the Committee’s monograph discussing “Adjudication.” It explains how the FTC has used § 6(g) to develop “elaborate” procedural rules to support its adjudicative activities:

Section 5 (b) of the Federal Trade Commission Act provides that when the Commission has reason to believe that any person–

has been or is using an unfair method of competition or unfair or deceptive act or practice in commerce, and if it shall appear to the Commission that a proceeding by it in respect thereof would be to the interest of the public, it shall issue and serve upon such person, partnership, or corporation a complaint stating its charges in that respect and containing a notice of a hearing upon a day and at a place therein fixed at least thirty days after the service of said complaint.

At that time, the section continues, the person so complained of may appear and show cause why he should not be ordered to cease and desist from the unlawful conduct with which he is charged; the testimony in the proceeding “shall be reduced to writing,” and if the Commission is of the opinion that a violation has been established, “it shall make a report in writing in which it shall state its findings as to the facts and shall issue and cause to be served” an order to cease and desist. Upon this modest statutory foundation the Commission has built an elaborate procedure, resembling closely the conventional legal procedure, drawing its power to do so from section 6 (g) of the act, which authorizes it to “make rules and regulations for the purpose of carrying out” the provisions of the act.

Later, beginning on page 30, the Committee discusses the FTC’s “Rule Making” activities (footnotes omitted):

Although the Federal Trade Commission is an at least potentially important adjunct of the legislative process as an investigative agency of Congress, its own substantive rule-making powers are narrowly limited. The Federal Trade Commission issues only two kinds of rules–trade practice rules and rules of practice to govern procedure in formal proceedings before the Commission. The Commission has not yet exercised the power conferred upon it by section 2 (a) of the Clayton Act (Robinson Patman Act) to fix quantity limits for price differentials.

RULES OF PRACTICE

Section 6 (g) of the Federal Trade Commission Act authorizes the making of “rules and regulations for the purpose of carrying out the provisions of this act.” Pursuant to this authority, the Commission has promulgated Rules of Practice which govern the procedure in formal proceedings instituted by the Commission. Rules of Practice are issued and amended by the Commission with the advice of the Chief Counsel, and without prior notice to the public or opportunity for hearing upon the proposed rules or amendments. The Commission has published its rules of practice in a pamphlet entitled “Rules, Policy and Acts,” which is available to the public without charge; and a copy of which is sent to every respondent at the time of service of the complaint. The rules of practice are also published in the Commission’s annual reports. Amendments to the rules of practice are published in the Federal Register.

TRADE PRACTICE RULES

If administrative rule making is defined as the promulgation of detailed regulations in furtherance of a statutory policy, pursuant to authority conferred by that statute, the Commission’s Trade Practice Rules should be classified perhaps as “Advisory Interpretations” rather than as “Rules.” Nothing in the statutes administered by the Commission makes any provision for the promulgation of rules applicable to whole industries. Nevertheless, the legislative history of the Federal Trade Commission Act abounds with indications that the then proposed Commission was expected to do more than institute formal adversary proceedings in the clarification of the law of unfair competition. The Trade Practice Rules represent a partial realization of those expectations. Trade practice rules are drawn up jointly by the Commission and the members of a given industry for that industry, and are divided into group I and group II rules. Group I rules comprise definitions, drawn in terms of the particular industry’s problems, of unfair methods of competition and unfair or deceptive acts or practices prohibited by the statutes administered by the Commission as construed in previous decisions of the Commission or the courts. Thus, the Group I Trade Practice Rules for the fur industry relate to such practices as misrepresentation of products, misrepresentation of the geographical origin of furs, deceptive substitution of furs, false invoicing, defamation of competitors, and inducing breach of contract. The group I rules, being merely particularized restatements, are not intended to make unlawful any act which is not unlawful under the Federal Trade Commission Act or the Clayton Act. That is, violation of a group I rule constitutes a violation of law, but solely for the reason that the method, act, or practice declared by the rule to be an unfair trade practice is unlawful under a controlling statute. Accordingly, group I rules have no force or content except in so far as they constitute an accurate statement of the statutory prohibitions; they serve as interpretations of existing law, not as additions to its substantive content. This is evidenced in complaints issued by the Commission in cases arising out of nonobservance of a group I rule, in that the complaints make no reference to the rule but charge violations of the applicable statute.

Group II rules are described by the Commission as follows:

The trade practices embraced in these group II rules are considered to be conducive to sound business methods and are to be encouraged and promoted individually or through voluntary cooperation exercised in accordance with existing law. Nonobservance of such rules does not, per se, constitute a violation of law. However, the failure to observe them under certain circumstances may result in an unfair method of competition contrary to law. In such event, a corrective proceeding may be instituted by the Commission as in the case of violation of group I rules.

There are no cases in which the Commission had instituted formal proceedings solely on the basis of a violation of a group II rule.

The final subsection, which occupies a bit under 3 pages, discusses the “Trade Practice Conference Procedure” that the FTC used to formulate its trade practice rules. As I’ve explained in a prior article, this kind of conference procedure was used by a number of agencies and informed the APA’s notice-and-comment procedure. That article, and this one, also explains more about the Attorney General’s Committee and the importance of its research for informing the APA. And if you want to read the whole monograph on the FTC (or any of the legislative history of the APA), you can find it in the Bremer-Kovacs Collection on HeinOnline.