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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