NEW VOICES: FTC Rulemaking for Noncompetes

Kacyn H. Fujii —  3 May 2022 — Leave a comment

[The tenth entry in our FTC UMC Rulemaking symposium comes from guest contributor Kacyn H. Fujii, a 2022 J.D. Candidate at the University of Michigan Law School. Kacyn’s entry comes via Truth on the Market‘s “New Voices” competition, open to untenured or aspiring academics (including students and fellows). You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

On July 9, 2021, President Joe Biden issued an executive order asking the Federal Trade Commission (FTC) to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” This executive order raises two questions. First, does the FTC have the authority to issue such a rule? And second, is FTC rulemaking a better solution than adjudication to solve the widespread use of noncompetes? This post contends that the FTC possesses rulemaking authority and that FTC rulemaking is a better solution than adjudication for the problem of noncompete use, especially for low-wage workers.

FTC’s Rulemaking Authority

In 1973, the U.S. Court of Appeals for the D.C. Circuit in National Petroleum Refiners Association v. FTC held that the Federal Trade Commission Act permitted the FTC to promulgate rules under its unfair methods of competition (UMC) authority. Specifically, it interpreted Section 6(g), which gives the FTC the authority “to make rules and regulations for the purpose of carrying out the provisions in this subchapter,” to allow rulemaking to carry out the FTC’s Section 5 authority. In his remarks at the 2020 FTC workshop on noncompetes, Richard Pierce of George Washington University School of Law argued that no court today would follow National Petroleum’s reasoning, even going so far as to call its logic “preposterous.” BYU Law’s Aaron Nielson agreed that some of National Petroleum’s reasoning was outdated but conceded that its judgment might have been correct. Meanwhile, FTC Chair Lina Khan and former FTC Commissioner Rohit Chopra have spoken in favor of the FTC’s competition-rulemaking authority, both from a legal and policy perspective.

National Petroleum’s focus on text is consistent with the approaches that courts today take. The court first addressed appellees’ argument that the FTC may carry out Section 5 only through adjudication, because adjudication was the only form of implementation explicitly mentioned in Section 5. The D.C. Circuit noted that, although Section 5(b) granted the FTC adjudicative authority, nothing in the text limited the FTC only to adjudication as a means to implement Section 5’s substantive protections. It dismissed the appellee’s argument that expressio unius meant that adjudication was the only mechanism the agency had available to implement Section 5. The D.C. Circuit also rejected the district court’s interpretation of the legislative history, because it was too ambiguous to find Congress’s “specific intent.” Similar to the approach courts take today, National Petroleum gave the text primacy over legislative history, putting significant weight on the fact that the language of Sections 5 and 6(g) is broad.

It is true that, as Nielson notes, courts today would not so readily dismiss employing canons like expressio unius. But courts today would not necessarily employ expressio unius either. The language of Section 6(g) authorizing FTC use of rulemaking is clear and broad, expressly including Section 5 among the sections the FTC may implement through rulemaking, so Congress may have not thought it necessary to explicitly mention rulemaking in Section 5. Given how clear the language is, it also does not seem so farfetched that a court today would decide to not apply the expressio unius canon to imply an exception to the language. As the Court has commented in rejecting the expressio unius canon’s implications, “the force of any negative implication [from this canon] depends on context,” and can be negated by indications that an enactment was “not meant to signal any exclusion.”

Others argue that National Petroleum’s interpretation of Sections 5 and 6(g) would not hold up in light of newer interpretive moves deployed by courts. For example, former FTC Commissioner Maureen Ohlhausen and former Assistant Attorney General James Rill contend that the FTC should not have broad competition-rulemaking authority because of the “elephants-in-mouseholes” doctrine articulated in Whitman v. American Trucking. They invoke AMG Capital Management v. FTC as evidence that the Court is wary about “allow[ing] a small statutory tail to wag a very large dog.” The Court in AMG considered whether Section 13(b) of the FTC Act, which expressly authorized the FTC to seek injunctive relief from the federal courts, also permitted the agency to seek monetary damages. The Court concluded that the FTC could not seek monetary damages from courts. Permitting this would allow the FTC to bypass its administrative process altogether, thus contravening Congress’ goals by failing to “produce[] a coherent enforcement scheme.” However, Sections 5 and 6(g) are distinguishable from the statutory provision at issue in AMG. Unlike Section 13(b), which did not explicitly grant the FTC authority to seek monetary damages, Section 6(g) does explicitly give the FTC rulemaking authority to carry out the other provisions of the Act with no limitations on this broad language.  Meanwhile, there is no “coherent enforcement scheme” that would be served by limiting Section 6 only to methods to carry out Section 5’s adjudicative authority. Rulemaking authority does not detract from the FTC’s ability to adjudicate.

One could also argue that, according to the “specific over the general” canon, adjudication should be the FTC’s primary implementation method: Section 5(b), which is very specific in its description of the FTC’s adjudicative authority, should govern over Section 6(g), which discusses rulemaking only in general language. But there is no inherent conflict between the general and specific provisions here. Even if adjudication was intended as the primary implementation method, Section 5 does not explicitly preclude rulemaking as an option in its text. There may be valid functional reasons that Congress would want an agency that acts primarily through adjudication to also have substantive rulemaking authority. National Petroleum itself observed that “the evolution of bright-line rules [through adjudication] is often a slow process” and that “legislative-type” rulemaking procedures allow the agency to consider “broad range of data and argument from all those potentially affected.” In addition, as Emily Bremer of Notre Dame Law School observes, Congress consistently sets more specific guidelines for adjudication to meet individual agency and program needs, resulting in “extraordinary procedural diversity” across adjudication regimes. The greater level of specificity with respect to adjudication in Section 5(b) of the FTC Act may simply reflect Congress’ perceived need to delineate adjudication regimes in further detail than it does for rulemaking.

In addition, some who are doubtful about the FTC’s rulemaking authority have cited legislative context. Specifically, Ohlhausen and Rill argue that the Magnuson-Moss Warranty Act demonstrates Congress’ concern with the FTC having expansive rulemaking power. Thus, broad competition-rulemaking authority would be inconsistent with the approach Congress took in Magnuson-Moss. However, the passage of Magnuson-Moss also implies that Congress thought the FTC had existing rulemaking power that Congress could limit—thus validating National Petroleum’s overall holding that the FTC did have rulemaking authority. In addition, Congress could have also extended Magnuson-Moss’s limits on rulemakings to competition-rulemaking authority but decided to apply it only to the FTC’s consumer-protection authority. This interpretation is supported by the text as well. The Magnuson-Moss provision expressly states that its changes “shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.” Congress specifically exempted competition rulemaking from Magnuson-Moss’s additional procedural requirements. If anything, this demonstrates that Congress did not want to interfere with the FTC’s competition authority.

The history of the FTC Act also supports that Congress would not have wanted to create an expert agency limited only to adjudicative authority. The FTC Act was passed during a time of unprecedented business growth, in spite of the passage of the Sherman Act in 1890. More specifically, Congress enacted the FTC Act in response to Standard Oil. Standard Oil established rule-of-reason analysis that some decried as a judicial “power grab.” Even though members of Congress disagreed about the proper scope of the FTC’s authority, all of the proposed plans for the FTC reflected Congress’ deep objections to the existing common law approach to antitrust enforcement. Congress was concerned that the existing approach was “yielding a body of law that was inconsistent, unpredictable, and unmoored from congressional intent.” Its solution was to create the FTC. The legislative context supports interpreting the statute to give the FTC all of the tools—including rulemaking—to respond effectively to nascent antitrust threats.

Finally, the FTC’s historical reliance on adjudication does not mean that it lacks the authority to promulgate rules. Assuming the relevance of historical practice—an assumption AMG cast doubt upon when it spurned the FTC’s longstanding interpretation of the FTC Act—there are reasons that an agency may choose adjudication over rulemaking that have nothing to do with its views of its statutory authority. The FTC’s preference for adjudication may simply have reflected the policy-focused views of its leadership. For example, James Miller, who chaired the FTC from 1981 to 1985, had “fundamental objections to marketplace regulation through rulemaking” because he thought Congress would exert too much pressure on rulemaking efforts. He attempted to thwart ongoing rulemaking efforts and instead vowed to take an “aggressive” approach to enforcement through adjudication. But this does not mean he thought the FTC lacked the authority to promulgate rules at all. Over the past several decades, the courts and federal antitrust enforcers have taken a non-interventionist or laissez-faire approach to enforcement. The FTC’s history of not relying on rulemaking may simply be indicators of the agency’s policy preferences and not its views of its authority.

In short, National Petroleum’s interpretive moves are sound and its conclusion that the FTC possesses UMC-rulemaking authority should stand the test of time. 

Benefits of FTC Rulemaking for Curbing Non-Compete Use

President Biden’s executive order also raised the question of whether FTC rulemaking is the right tool to address the problem of liberal noncompete use. This post argues that FTC rulemaking would have tangible benefits over adjudication, especially for noncompetes that bind low-wage workers.

The Problem with Noncompetes

Noncompete clauses, which restrict where an employee may work after they leave their employer, have been used widely even in contexts divorced from the justifications for noncompetes. Typical justifications for noncompetes include protecting trade secrets and goodwill, increasing employers’ incentives to invest in training, and improving employers’ leverage in negotiations with employees. Despite these justifications, noncompetes are used for workers who have no access to trade secrets or customer lists. According to a survey conducted in 2014, 13.3% of workers that made $40,000 per-year or less were subject to a noncompete, and 33% of those workers reported being subject to a noncompete at some point in the past. Noncompete use reduces worker mobility, even for those workers not themselves bound by noncompetes. It also results in lower wages for those bound by noncompetes. Interestingly, these effects on worker mobility and wages are present even in states where noncompetes are unenforceable.

Although noncompetes are typically governed on the state level, the magnitude of noncompete use could pose an antitrust problem. Noncompetes help employers maintain “high levels of market concentration,” which “reduce[s] competition rather than spur[ring] innovation.” However, it can be very difficult for private parties and state enforcers to challenge noncompete use under antitrust law. One employer’s use of noncompetes is unlikely to have an appreciable difference on the labor market. The harm to labor markets is only detectable in aggregate, making it virtually impossible to succeed on an antitrust challenge against an employer’s use of noncompetes. Indeed, University of Chicago Law’s Eric Posner has observed that, as of 2020, there were “a grand total of zero cases in which an employee noncompete was successfully challenged under the antitrust laws.” According to Posner, courts either claim that noncompetes involve “de minimis” effects on competition or do not create “public” injuries for antitrust law to address.

And while there have been a handful of settlements between state attorneys general and companies that use noncompetes—like the settlement between then-New York Attorney General Barbara D. Underwood and WeWork in 2018—these settlements capture only the most egregious uses of noncompetes. There are likely many other companies who use noncompetes in anticompetitive ways, but they do not operate at such scale as to warrant an investigation. State attorneys general have resource constraints that limit them to challenge only the most harmful restraints on workers. Even if these cases went to trial, instead of settling, their precedential effect would thus set only the upper bound for what is an anticompetitive use of noncompete agreements.

Further, the FTC’s current approach of relying on adjudication is unlikely to be effective in curbing widespread noncompete use. Scholars have critiqued the FTC’s historical reliance on adjudication, saying that it has failed to generate “any meaningful guidance as to what constitutes an unfair method of competition.” Part of this is because antitrust law largely relies on rule-of-reason analysis, which involves a “broad and open-ended inquiry” into the competitive effects of particular conduct. Given the highly fact-specific nature of rule-of-reason analysis, the holding of one case can be difficult to extend to another and thus leads to problems in administrability and efficiency. Even judges “have criticized antitrust standards for being highly difficult to administer.” Reliance on the rule of reason also leads to a lack of predictability, which means that market participants and the public have less notice about what the law is.

In addition, private parties cannot litigate UMC claims under Section 5 of the FTC Act; the agency itself must determine what counts as an unfair method of competition. Perhaps because of resource constraints, the FTC has only brought a “modest number” of cases that “provide an insufficient basis from which to attempt to generate substantive rules defining the Commission’s Section 5 authority.”

Benefits of Rulemaking

FTC rulemaking under its UMC authority would avoid many of the problems of a case-by-case approach. First, rulemaking would provide clarity and efficiency. For example, a rule could declare it illegal for employers to use noncompetes for employees making under the median national income. Such a rule clearly articulates the FTC’s policy and is easy to apply. This demonstrates how rulemaking can be more efficient than adjudication. In order to implement a similar policy through adjudication, the FTC may have to bring many cases covering various industries and defendants that employ low-wage workers, given the nature of rule-of-reason analysis.

Rulemaking is also more participatory than adjudication. Interested parties and the general public can weigh in on proposed rules through the notice-and-comment process. Adjudication involves only those who are party to the suit, leaving “broad swaths of market participants watching from the sidelines, lacking an opportunity to contribute their perspective, their analysis, or their expertise, except through one-off amicus briefs.” However, low-wage workers are unlikely to have the resources required to prepare and submit an amicus brief and may not even be aware of the litigation in the first place. In contrast, it is much easier for low-wage workers or their future employers to participate in the notice-and-comment process, which only requires submitting a comment through an online form. Unions or employee-rights organizations can help to facilitate worker participating in rulemaking as well.

A uniform approach through rulemaking means that more workers will be on notice of the FTC’s policy. Worker education is an important factor in solving the problem. Even in states where noncompetes are not enforceable, employers still use and threaten to enforce noncompetes, which reduces worker mobility. A clear policy articulated by the FTC may help workers to understand their rights, perhaps because a national rule will get more media attention than individual adjudications.

Although it may be true that rulemaking is, in general, less adaptable than adjudication, there may be a category of cases where our understanding is unlikely to change over time. For example, agreements to fix prices are so clearly anticompetitive that they are per se illegal under the antitrust laws. Our understanding of the anticompetitive nature of price fixing is highly unlikely to change over time. 

Noncompetes for low-wage workers should be in this category of cases. This use of noncompetes is divorced from traditional justifications for noncompetes. The nature of the work for low-wage workers—say, for janitors or cashiers—is unlikely to ever require significant employer resources for training or disclosure of customer lists or trade secrets. Given the negative effects that noncompetes can have on mobility and wages, even in states where they are not enforceable, they clearly do more harm than good to the labor market. It is difficult to imagine that market conditions or economic understanding would change this.

Further, even though rulemaking can take time, the FTC’s adjudicative process is not necessarily much better. In 2015, adjudications through the FTC’s administrative process typically took two years. Former FTC Commissioner Philip Elman once observed that case-by-case adjudication “may simply be too slow and cumbersome to produce specific and clear standards adequate to the needs of businessmen, the private bar, and the government agencies.” Even if rulemaking takes longer, it may still be more efficient because of a rule’s ability to apply across the board to different industries and types of workers. It may also be more efficient because it is better able to capture all of the relevant considerations through the notice-and-comment process.

It is true that some states already have a bright-line rule against noncompetes by making noncompetes unenforceable. Even so, there is value in establishing a bright-line rule through rulemaking at a federal level: this provides greater uniformity across states. In addition, rulemaking could have some value if it is used to establish notice requirements—for example, the FTC could promulgate a rule requiring employers to notify employees of the relevant noncompete laws. Notice requirements are one example where case-by-case adjudication would be especially ineffective.

Conclusion

In certain contexts, rulemaking is a better alternative to adjudication. Noncompete use for low-wage workers is one such example. Rulemaking provides more uniformity, notice, and opportunity to participate for low-wage workers than adjudication does. And given that both state noncompete law and federal antitrust law require such fact-specific inquiries, rulemaking is also more efficient than adjudication. Thus, the FTC should use its competition-rulemaking authority to ban noncompete use for low-wage workers instead of relying only on adjudication.

Kacyn H. Fujii

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Kacyn H. Fujii is a 2022 J.D. Candidate at the University of Michigan Law School,

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