“Non-compete agreements that are unreasonable as to temporal length, subject matter, and/or geographic scope will be found to violate both federal and state antitrust laws.”
That’s new — especially because it’s from Federal Trade Commission Commissioner Christine Wilson.
But, at the end, Commissioner Wilson observed, “The elected officials in each state are best situated to weigh the costs and benefits of non-competes and make decisions tailored to the unique circumstances in their jurisdictions. . . . A federal solution at this time is premature.”
Here’s what happened…
On September 28, 2021, Federal Trade Commission Commissioner Christine Wilson submitted written testimony to the House Judiciary Committee Subcommittee on Antitrust, Commercial and Administrative Law, discussing “monopsony and labor issues” and “address[ing] antitrust enforcement and proposals that impact labor markets, including occupational licensing, monopsony, and non-compete and no-poach agreements.” (P.2.)
Focusing on the “many and varied” issues in “Big Tech,” Commissioner Wilson started with a detailed summary of U.S. antitrust laws and the FTC’s role, observing that “just because we hold the hammer of antitrust law in our hands does not mean we should treat every concern as a nail, lest we risk bludgeoning our entire economy. The better approach is to disaggregate the varied concerns about the tech sector and address each concern with the appropriate tools.” (P.3.)
Turning to what the FTC can do, Commissioner Wilson notes, “we should keep two points in mind during this discussion. First, the antitrust laws as they exist today embody concepts like monopsony and prohibit anticompetitive agreements like no-poach agreements and unreasonable non-competes. Second, antitrust enforcement as it exists today supports challenges to anticompetitive conduct that harms labor, middlemen, and other entities beyond the end consumer.” (P.4 (emphasis in original).)
Noncompete Agreements
In addressing noncompete agreements, Commissioner Wilson stated (in full) as follows:
Non-compete agreements that are unreasonable as to temporal length, subject matter, and/or geographic scope will be found to violate both federal and state antitrust laws. Moreover, state and common law provide rich guidance on this topic. And to date, the economic evidence regarding the impact of non-competes in the labor arena is mixed. For these reasons, I believe we should heed the wise guidance of Justice Brandeis, who noted that “a single courageous state may, if its citizens choose, serve as a laboratory” and “[d]enial of the right to experiment may be fraught with serious consequences to the nation.”
Studies analyzing the impact of non-competes in the labor arena have revealed mixed results. Some studies have found that non-competes suppress employee wages and mobility. For example, one study found that a ban on non-competes for technology workers increased mobility by 11 percent and new-hire wages by four percent. Another study concluded that moving from the 10th to the 90th percentile in enforceability on non-competes decreased earnings by three to four percent. For low-wage workers, the group that has received the most attention, Michael Lipsitz (of the Federal Trade Commission) and Evan Starr found that Oregon’s 2008 ban on non-competes for low-wage workers increased hourly wages by up to roughly three percent.
Other studies have found that non-competes have a beneficial impact on employee wages and other employee benefits. For example, one study concluded that physicians who sign non-competes tend to earn more money. Another stud found that non-competes increase incentives for firm-sponsored employee training. And other research has revealed that employee awareness of non-competes before offers are accepted generates higher wages relative to employees without non-competes.
It is also important to consider the impact of non-competes on stakeholders other than employees. Non-compete agreements can facilitate innovation by assuring firms that trade secrets and other firm know-how will not be transferred to a rival. One study compared high and low non-compete enforceability regimes and concluded that enforceability facilitates riskier research and development investments. Another study of financial advisors found that ending enforcement of non-competes lowered prices to consumers, but also led to a larger than 40 percent increase in incidents of misconduct because firms were more reluctant to discipline advisors. Non-competes can also help firms and workers match more appropriately based on separation costs.
States have or are moving to adopt laws in this area. In California, North Dakota, and Oklahoma, non-competes are prohibited. And several states have considered or passed legislation that limit non-competes for certain types of employees (e.g., Hawaii, New Mexico, and Oregon). Many states are considering bills or adjusting already passed legislation to address employee non-competes.
Despite mixed evidence on the impact of non-competes and the growing number of states with not just common law but legislation, some commentators continue to advocate for a federal solution. They assert that even when non-competes violate state law, employees who cannot afford a lawyer may experience an in terrorem effect. But state attorneys general are well-positioned to take an active role in this arena, as the New York Attorney General did in its heavily publicized settlement with Jimmy John’s.
As Justice Brandeis wrote, “[t]o stay [state-by-state] experimentation in things social and economic is a grave responsibility.” The elected officials in each state are best situated to weigh the costs and benefits of non-competes and make decisions tailored to the unique circumstances in their jurisdictions. And as with occupational licensing suspensions during the pandemic, state-by-state changes will provide beneficial opportunities for research in this area. A federal solution at this time is premature.
(Pp. 9-10 (footnotes omitted).)
No-Poach Agreements
Commissioner Wilson then moved on to no-poach agreements, providing the FTC’s history of enforcement in that area and concluding that the FTC’s 2016 “guidance [on no-poach agreements] and enforcement history in this area shows that the FTC, the DOJ, and state attorneys general take this conduct and resulting harms to labor markets seriously.” (Pp. 12-14.)
“Procedural Irregularities”
Finally, Commissioner Wilson turned to “procedural irregularities” at the FTC, stating that “[n]ew agency leadership unfortunately has made meaningful dialogue among Commissioners, and between the Commission and its stakeholders, difficult by:
- Muzzling staff internally and externally;
- Stifling the flow of agency records and information from staff to the Commission;
- Largely abandoning the tradition of comprehensive staff recommendations discussing legal and economic issues, prudential considerations and litigation risks for matters before the Commission;
- Giving minimal notice to Commissioners (and the public) of sweeping policy changes;
- Giving no written explanations for sweeping policy changes until after those changes are implemented;
- Evading meaningful dialogue at the Commission level;
- Voting against notice and comment on major policy changes; and
- Short-circuiting public input by adopting policy statements during ongoing rulemakings that address precisely the topics at issue.
From these, Commissioner Wilson warned of the short- and long-term ramifications of the Commission’s current divisiveness. In that regard, it seems reasonably clear at this point that three of the Commissioners will want to regulate noncompetes and two won’t. So, I expect that the FTC will regulate.
The issue will then be, what will they regulate? All noncompetes? Noncompetes for low-wage workers? I’m predicting the latter. There are justifiable, philosophical reasons to do it, and there’s too much uncertainty about regulating beyond that. I also expect we’ll see some “fairness and transparency” regulations, like those suggested by President Obama in his Call to Action on noncompetes or like those set out in the letter that I and nearly 60 other lawyers and paralegals submitted in July.
Some Backstory
The FTC starting looking at noncompetes in earnest starting in January 9, 2021, during a full-day workshop on noncompetes called Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues. Since then, although the FTC has not conducted the planned additional workshop(s), there have been been various indications (including the one above) about how some of the FTC commissioners view noncompetes and how they view the scope of the FTC’s power.
For example, on March 18, 2021, Commissioner Noah Phillips submitted written testimony to the Subcommittee on Antitrust, Commercial and Administrative Law Of the Judiciary Committee United States House of Representatives. Though not mentioning noncompetes per se, Commissioner Phillips observed as follows:
We look at prices—and none of us should work to make Americans pay more for our food, healthcare, and other needs—but welfare-enhancing competition can occur on multiple fronts, including output, quality, and innovation. Businesses compete to hire workers and buy inputs, just like they compete to sell products and services. Antitrust cares about all of these things.
Antitrust is a powerful tool, but—like any body of law—it has limits. The antitrust laws are not designed to address every problem large companies create, because they protect competition; and even perfect competition cannot solve every problem. So we must be realistic about the antitrust laws, and reforms to them. Some calls for reform seem to promise that antitrust can solve a host of issues in our society, from the political power of large corporations to privacy to labor rights to racial inequality. These are serious matters, worthy of serious attention; but antitrust is a poor tool for addressing them. Does competition help address social problems? Without a doubt. When companies compete to lower prices, for example, people with fewer means have access to more products. That is good for distributional equity. But antitrust is not, and should not be, a regulatory catch-all.
At p. 3.
While Commissioner Wilson and Commissioner Noah Phillips tend to question the authority and wisdom of regulating noncompetes (which has never before been regulated by the federal government), that is not necessarily the view of the other three commissioners. In fact, on March 18, 2021, then-Acting FTC Chair Rebecca Slaughter submitted her own written testimony to the Subcommittee on Antitrust, Commercial and Administrative Law Of the Judiciary Committee United States House of Representatives.
In that testimony, Commissioner Slaughter made several comments about her belief that the FTC has the power and should regulate noncompetes. For example, Commissioner Slaughter said as follows:
The FTC has an obligation to ensure the economic system and markets are not rigged to benefit the big and powerful and against the consumers, workers, and entrepreneurs who rely on competitive and fair markets. Robust antitrust enforcement primes the economy for newcomers so that anyone with a great idea can fully participate in markets free of monopolistic practices.
* * *
I strongly support the Commission taking up and considering a rulemaking to address unfair and anticompetitive non-compete provisions in employment contracts. That is just one of many good ideas that have been surfaced for competition rulemaking, and I am eager to explore them. Elevating rule-making efforts across our mission is a top priority for me and I believe will serve as a force multiplier for FTC enforcement efforts, especially in light of challenging jurisprudence.
And, of course, FTC Chair Lina Khan (prior to her appointment to the FTC) along with Commissioner Rohit Chopra wrote an article, The Case for “Unfair Methods of Competition” Rulemaking, 87 The University of Chicago Law Review, 357 (2020), in which they stated:
Anticompetitive practices that are reachable under the other antitrust laws but that private litigation is unlikely to target may also be ripe for rulemaking. Take, for example, noncompete clauses in employment contracts. These agreements prevent em- ployees from working for rival firms for a period of time after they leave. As recent studies show, these agreements—which now cover roughly twenty-eight million Americans—deter workers from switching employers, weakening workers’ credible threat of exit, and diminishing their bargaining power.68 By reducing the set of employment options available to workers, employers can suppress wages.
In theory, workers could bring lawsuits alleging that certain noncompete clauses are anticompetitive under the Sherman Act. In practice, however, private litigation in this area is effectively nonexistent. Employers now frequently include in employment contracts forced arbitration clauses and class action waivers, pro- visions that prevent workers from banding together to bring a case in court.69 Any challenges must be pursued in isolation and through a private arbitrator, whose proceedings lie entirely out- side the common law system.
Given the paucity of private litigation challenging noncompete agreements as antitrust violations, the FTC might consider engaging in rulemaking on this issue. A rule could grant clarity as to when noncompete agreements are permissible or not. Pur- suing this through rulemaking will allow for a general rule that would give notice to a much larger set of market participants than addressing noncompetes through adjudication.
Id. at 373-74.
But, does the FTC have authority to regulate employee noncompetes?
This question was debated during the FTC’s January 2020 workshop. (The transcript is available here.) There appears to be no clear answer. However, it’s hard to imagine that they do.
I won’t get into the Constitutional theory of federal powers, Congressional delegation of power issues, or the scope of the authority granted to the FTC, except to note the following:
Noncompetes have been around since the Middle Ages. They have been regulated in the United States for over 200 years — exclusively by the states. In 2015-16, the federal government stepped in in two ways: (1) Congress proposed federal legislation; and (2) President Obama urged the states to take action — which they have been doing. Only after multiple legislative efforts failed did the the FTC get involved. Even assuming that the federal government has authority to regulate contracts (typically thought of a classic state issue), given the history, it’s hard to see how Congress (as opposed to a few members of Congress who have sought to push the FTC to take action) intended to delegate its authority to the FTC on this issue.
To be clear, I am not questioning whether the FTC has power to regulate noncompetes in the context of a merger or other inter-company transaction. I believe they do.
Rather, I question only the power to regulate intracompany contracts.
What’s next?
Now we wait.
There’s been no indication of FTC action yet, though we’ll continue to monitor it. Similarly, the three federal bills remain extant. We’ll be monitoring those too. Stay tuned.