More, and not just about noncompetes, but first, yes (mea culpa/s’lach lanu), more about noncompetes.
Yesterday on Truth on the Market, I provided an overview of comments filed by the International Center for Law & Economics on the Federal Trade Commission’s (FTC) proposed noncompete rule. In addition to ICLE’s Geoffrey Manne, Dirk Auer, Brian Albrecht, Gus Hurwitz, and myself, we were joined in our comments by 25 other leading academics and former agency officials, including former chief economists at the U.S. Justice Department’s (DOJ) Antitrust Division and a former director of the FTC’s Bureau of Economics.
Not to beat a dead horse, but this is important, as it’s the FTC’s second-ever attempt to promulgate a competition rule under a supposed general rulemaking authority, and the first since the unenforced and long-ago rescinded rule on the Men’s and Boys’ Tailored Clothing Industry, initially adopted in 1967. Not incidentally, this would be a foray into regulation of the terms of labor agreements across the entire economy, on questionable authority (and certainly no express charge from Congress).
I’d also like to highlight some other comments of interest. The Global Antitrust Institute submitted a very thorough critique covering both the economic literature and fundamental issues of antitrust law, as did the Mercatus Center. Washington Legal Foundation covered constitutional and jurisdictional questions, as did comments from TechFreedom. Another set of comments from TechFreedom suggested that the FTC might consider regulating some noncompetes under its Magnusson-Moss Act consumer-protection rulemaking authority, at least after development of an appropriate record.
Asheesh Agarwal submitted comments reviewing legal concerns and risks to the FTC’s authority on behalf of a number of FTC alumni, including, among others, two former directors of the FTC’s Bureau of Economics; two former FTC general counsels; a former director of the FTC’s Office of Policy Planning; a former FTC chief technologist; a former acting director of the FTC’s Bureau of Consumer Protection; and me.
American Bar Association comments that critique the use of noncompetes for low-wage workers but stop short of advocating FTC regulation are here. For an academic pro-regulatory perspective, there were comments submitted by professors Mark Lemley and Orly Lobel.
For additional Truth on the Market posts on the rulemaking, I’d point to those by Alden Abbott, Brian Albrecht (and here), Corbin Barthold, Gus Hurwitz, Richard Pierce Jr., and yours truly. Also, a Wall Street Journal op-ed by Eugene Scalia and Svetlana Gans.
That’s a lot, I know, but these really do explore different issues, and there really are quite a few of them. No lie.
Bringing the Axon Down
As a reward for your patience—or your ability to skip ahead—now for the week’s other hot issue: the U.S. Supreme Court’s decision in Axon Enterprise Inc. v. FTC, which represented a 9-0 loss for the commission (and for the U.S. Securities and Exchange Commission). Does anybody remember the days—not so long ago, if not under current leadership—when the commission would win unanimous court decisions? Phoebe Putney, anyone?
A Bloomberg Law overview of Axon quoting my ICLE colleague Gus Hurwitz is here.
The issue in Axon might seem a narrow one at the intersection of administrative and constitutional law, but bear with me. Enforcement of the FTC Act and the SEC Act often follow a familiar pattern: an agency brings a complaint that, if not settled, may be heard by an administrative law judge (ALJ) in a hearing inside the agency itself. In the case of the FTC, a decision by the ALJ can be appealed to the commission itself. Thus, if the commission does not like the ALJ’s decision, it can appeal to itself.
As a general matter, once embroiled in such “agency process,” a defendant must “exhaust” the administrative process before challenging the complaint (or appealing an ALJ or commission decision) in federal court. That’s known as the Doctrine of Exhaustion of Administrative Remedies (see, e.g., McKart v. United States). The doctrine helps to conserve judicial resources, as the courts do not have to consider every challenge (including procedural ones) that arises in the course of administrative enforcement.
The disadvantage, for defendants, is that they may face a long and costly process of agency adjudication before they ever get before a federal judge (some FTC Act complaints initially are brought in federal court, but set that aside). That can exert substantial pressure to settle, even when defendants think the government’s case is a weak one.
At issue in Axon, was the question of whether a defendant had to exhaust agency process on the merits of an agency complaint before bringing a constitutional challenge to the agency’s enforcement action. The agencies said yes, natch. The unanimous Supreme Court said no.
To put the question differently, do the federal district courts have jurisdiction to hear and resolve defendants’ constitutional challenges independent of exhaustion? “The answer is yes,” said the Supreme Court of the United States. According to the court—and reasonably—the agencies don’t have any special expertise on such constitutional questions, even if they have expertise in, say, competition or securities policy. On fundamental constitutional questions, defendants can get their day in court without exhausting agency process.
So, what difference does that make? That remains to be seen, but perhaps more than it might seem. On the one hand, the Axon decision did not repudiate the FTC’s substantive expertise in antitrust (or consumer protection) or its authority to enforce the FTC Act. On the other hand, enforcement is costly for enforcers, and not just defendants, and the FTC is famously—as evidenced by its own recent pleas to Congress for more funding—resource-constrained, to an extent that is said to impair its ability to enforce the FTC Act.
As I noted yesterday, earlier this week, the commission testified that:
While we constantly strive to enforce the law to the best of our capabilities, there is no doubt that—despite the much-needed increased appropriations Congress has provided in recent years—we continue to lack sufficient funding.
The Axon decision means, among other things, that the FTC’s average litigation costs are bound to rise, as we’ll doubtless see more constitutional challenges.
But perhaps there’s more to it than that. At least two of the nine justices—Thomas, in a concurring opinion, and Gorsuch, concurring with the decision—signaled an appetite to further rein-in the agencies. And doing so would be part-and-parcel with a judicial trend against deference to administrative agencies. For example, in AMG Capital Management, the Supreme Court narrowly interpreted the commission’s power to obtain equitable remedies, and specifically monetary remedies, repudiating established commission practice. And in West Virginia v. EPA, the court demonstrated concern with the breadth of the administrative state; specifically, it rejected the proposition that courts defer to agency interpretations of vague grants of statutory authority, where such interpretations are of major economic and political import.
Where this will all end is anybody’s guess. In the near term, Axon will impose extra costs on the FTC. And the commission’s broader bid to extend its reach faces an uphill battle.