By Richard J. Pierce, Jr., the Lyle T. Alverson Professor
of Law at George Washington University and Member of the FSF Board of Academic
Advisors
New FTC Chair Lina Khan has
not sought my advice, but here it is. In his July 9 Executive Order, President
Biden described an antitrust agenda that he wants the FTC and the other
agencies with antitrust responsibilities to implement. His agenda consists of
72 major changes in competition law. Any agency that attempts to implement an
agenda that includes that many major changes in law at the same time is doomed
to failure. No agency has the resources required to implement an agenda that
ambitious. Chair Khan and her colleagues need to choose no more than half a
dozen parts of the president’s agenda to pursue immediately.
The FTC can begin the
prioritization process by deferring pursuit of the long list of changes in law
that Chair Khan proposed in her famous student Note and her first meeting as
Chair. I described some of those changes in my July 1 essay[1] and my July 3 essay.[2] The Supreme Court would reject those
changes because they are inconsistent with the approach to antitrust law that
the Court has pursued for fifty years. Absent enactment of a statute that
clearly compels the Court to reject everything that it has said and done for
half a century and to head in a direction that it has long rejected, pursuit of
any of those proposed changes would produce nothing but headlines followed by
judicial rejections.
There are five changes in law
in President Biden’s list that the FTC has been attempting to make for many
years, with limited success in court. I described those proposed changes in my
July 12 essay.[3] The FTC should continue to pursue those
socially-beneficial changes, but with the understanding that they are long-term
goals. The FTC is unlikely to succeed in persuading the courts to acquiesce in
most of those changes during President Biden’s first term in office.
The FTC’s number one
short-term goal should be to eliminate most of the non-compete clauses in
employment contracts. President Biden emphasized the severity of the problems
caused by non-compete clauses in the speech that he made when he announced his
antitrust agenda. As he noted, they now exist in about 30% of employment
contracts, including contracts for employment as a hamburger flipper in a fast
food restaurant. They inflict significant harm on employees by prohibiting them
from taking jobs that would improve their pay or working conditions.
Non-compete clauses
significantly impair the performance of the labor market by limiting the role
of competition. They are responsible for a significant part of the large gap
between our constantly increasing labor productivity and our stagnant wage
levels. That gap has grown over the past thirty years. They also have
contributed to the vast gaps in our income and wealth that have increased
dramatically in recent years.
The Supreme Court’s June 21
opinion in NCAA v. Alston provides powerful evidence that the Court
would be receptive to an FTC campaign to outlaw most non-compete clauses. The
Justices made it clear that they unanimously support efforts to improve the
performance of labor markets. They are prepared to hold unlawful any
anticompetitive practice that employers adopt as a means of artificially
depressing wages. Noncompete clauses fit that characterization perfectly.
There is a large body of
scholarship, including excellent empirical studies, that documents the severe
adverse effects of noncompete clauses on the performance of labor markets.
There is no evidence that they have offsetting social benefits in most
contexts. The FTC staff has already gathered and analyzed most of the evidence
it needs to launch a successful campaign against non-compete clauses. It hosted
an excellent workshop on the subject in 2019.[4]
Elimination of most
noncompete clauses would also benefit consumers by improving the performance of
markets for goods and services. Small firms and startups cannot compete
effectively with the large firms that now dominate many markets unless they can
hire some of the experienced workers that work for the large established firms.
Noncompete clauses preclude them from being able to lure those workers away
from the market incumbents, thereby crippling their efforts to succeed in
entering a market and thriving in that market. Because of non-compete clauses,
a new market entrant cannot succeed even if it would be able to offer a
superior product or service if it could hire experienced workers.
The FTC should exercise
caution in two ways if it decides to prioritize elimination of most non-compete
clauses. First, the FTC should not overreach substantively. Most employers have
no chance of proving that their noncompete clauses further any socially
beneficial purpose. In a few narrow contexts, however, there is some theoretical
and empirical support for the argument that noncompete clauses yield net social
benefits. Thus, for instance, noncompete clauses may produce net benefits in
the context of high-paid scientists and senior executives who have unique
access to a firm’s trade secrets. The FTC should focus initially on the goal of
eliminating noncompete clauses in the contracts of low-paid employees.
Second, the FTC should not
overreach procedurally. The FTC will be tempted to rely on the D.C. Circuit’s
opinion in National Petroleum Refiners v. FTC,[5] to support issuance of rule that bans
noncompete clauses in most employment contracts. In that opinion, the court
held that the FTC can use notice and comment rulemaking to issue a rule that
implements section five of the FTC Act. The FTC should resist that temptation.
The D.C. Circuit’s 1973 opinion was based on a type of reasoning that no court
has used in decades, and courts have always been reluctant to uphold FTC
actions that are based solely on section five. The Supreme Court is virtually
certain to overrule the D.C. Circuit precedent if the FTC tries to rely on it.[6] I can even predict the language the
Court would use to overrule that opinion. In 2019, the Supreme Court overruled
a 1974 D.C. Circuit precedent with this explanation: “National Parks’
contrary holding is a relic from a bygone era of statutory interpretation.”[7]
It would be a shame if the
FTC went through the lengthy and resource-intensive notice and comment process
only to have the Supreme Court reject its work product on procedural grounds.
The FTC can easily accomplish the goal of eliminating most noncompete clauses
by using a combination of procedural tools and substantive authority that it
has long used and that courts have long accepted. It can issue a statement of
enforcement policy in which it announces, explains, and supports with solid
evidence, its policy of banning most noncompete clauses. It can then initiate
one or more high visibility, well-chosen enforcement actions in which it finds
that the noncompete clauses in the employment contracts of the low-paid
employees of a particular firm violate the Sherman Antitrust Act. By using that
approach, the FTC can implement one of President Biden’s most important goals
in a relatively short period of time.
[1] Richard Pierce, Fasten Your Seatbelts,
the FTC Is About to Take Us on a Rollercoaster Ride, Notice & Comment (July
1, 2021).
[2] Richard Pierce, Questions for
Proponents of Major Changes in Antitrust Law, Notice & Comment (July 3,
2021.)
[3] Richard Pierce, The Biden Antitrust
Agenda, Notice & Comment (July 12, 2021).
[4] See Richard Pierce, The U.S. Federal
Trade Commission Workshop on Noncompete Clauses, 23 Utilities Law Reports
(2020).
[5] 482 F. 2d 672 (D.C. Cir. 1973).
[6] See Richard Pierce, The Rocky
Relationship Between the Federal Trade Commission and Administrative Law, 83
G.W. L. Rev. 2026 (2015); Thomas Merrill & Kathryn Watts, Agency Rules with
the Force of Law: The Original Convention, 116 Harv. L. Rev. 467 (2002).
[7] Food Marketing Institute v. Argus
Leader Media, 139 S.Ct. 2356, 2364 (2019).
[This blog is cross-posted at
the Yale Journal on Regulation Notice
and Comment website.]
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