Yep, more about noncompetes. I’ve been at this a bit. I’m aware. Just last week, and then again here, here, here, here, and here at Truth on the Market; here in a more formal journal article; and here with my International Center for Law & Economics (ICLE) colleagues and scholars of law and economics.
Maybe “a bit” doesn’t quite cut it. But I do have a few excuses:
- This really does matter, as the Federal Trade Commission (FTC) adopted an economywide rule that would have significant implications across industries, occupations, and income levels;
- There’s a lot going on here, including a complex and developing economic literature about the effects of noncompete terms (or, at least, varying state policies about such terms), conditions of employment and job-seeking, wages, training, employee mobility, federalism, agency authority generally, and, specifically, the question of whether the FTC has the authority to issue substantive or “legislative” competition rules, among other things;
- There are various cases and controversies about these things across federal courts;
- Mea culpa; and
- S’lach lanu.
I actually cover some new ground below—I promise.
Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas issued a decision yesterday in Ryan v. FTC. The plaintiff—Ryan, a tax-services firm—had challenged the FTC’s authority to issue its Non-Compete Clause Rule, which banned the use of noncompete terms in employment agreements across much of the economy.
Spoiler alert (on the no-doubt counterfactual assumption that readers of my posts haven’t already seen the news): Ryan (and various intervenor plaintiffs) prevailed, the FTC lost, and Judge Brown has vacated the rule:
The Court sets aside the Non-Compete Rule. Consequently, the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.
Period—that’s a nationwide ban on the FTC’s nationwide ban. Can a single district court in Texas invalidate a federal rule nationwide? Yes. And we’ll get to that.
So, it’s over? No, not likely.
This was the first merits decision for the various challenges to the rule that have been working their way through the federal courts. Last week, I posted an update on those challenges, noting three preliminary decisions: Judge Timothy J. Corrigan of the U.S. District Court for the Middle District of Florida had issued a preliminary injunction in the case of Properties of the Villages Inc. v. FTC. Judge Corrigan stayed the effective date of the FTC’s rule, ruling that the plaintiff showed a “substantial likelihood of success on the merits.”
That brought the agency’s record to 1 win and 2 losses on preliminary injunctions. There had been a similar ruling against the agency in the Northern District of Texas, but an agency win in the Eastern District of Pennsylvania, where Judge Kelly Hodge had denied a motion for a stay of the rule’s effective date. Those were all about preliminary injunctions. The decisions turned on the question of whether the plaintiffs (those challenging the rule) had shown a substantial likelihood of success on the merits, but they were not themselves final decisions of those courts on the merits of the challenges.
In her preliminary decision, Judge Ada E. Brown of the Northern District of Texas had stated an intent to issue a merits decision on or before Aug. 31, and I had guessed it might go down to the wire. On the timing, I had guessed wrong. But on the substance, I guessed right, and no psychic powers were involved. Judge Brown’s decision on the preliminary injunction had, after all, depended on an assessment of whether the plaintiff had shown a substantial likelihood of success on the merits, and her memorandum opinion and order had been a careful one. It looked like a not-very-preliminary draft of a decision on the merits.
If a federal court has vacated a rule, and vacatur applies to the rule nationwide, we’re done, right? No, of course not.
The FTC has not yet said whether it will appeal the ruling, but I expect that it will. After all, the decision repudiates not just the noncompete rule, which has been a priority for the three Democrats sitting in the majority on the commission, but also the FTC’s authority to issue substantive or “legislative” competition rules in general. That they do possess such authority was a claim underscored in the FTC’s controversial 2022 “Policy Statement Regarding the Scope of Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act,” as well as in writings and remarks by FTC Chair Lina Khan.
Also, as former FTC Commissioner and Acting Chair Maureen Ohlhausen has observed, a circuit split may be in the works. A decision from the Northern District of Texas (in the 5th Circuit) may be persuasive authority for federal courts in the 11th Circuit (which includes Florida) and the 3rd Circuit (which includes Pennsylvania), but it is not binding authority for those courts. And no one should be surprised if Judge Corrigan (in Florida) and Judge Hodge (in Pennsylvania) stay the course and issue merits decisions along the lines of their preliminary decisions.
Not a few of us expect the question of the FTC’s authority to issue competition rules—or, perhaps, just sweeping competition rules such as these—to get to the U.S. Supreme Court. (See Dan Crane’s poll of law professors on the fate of the rule here.)
There is an interesting question regarding which issues will have traction, supposing the battles continue. Judge Brown’s opinion invalidated the rule on two grounds. First, there was the general question of whether the FTC has the power to issue substantive or “legislative” competition rules under Section 6(g) of the FTC Act. Here, the court recognized that, “[p]lainly read…the FTC has some authority to promulgate rules to preclude unfair methods of competition.”
However, after reviewing the text, structure, and history of the Act, the Court
concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is “indeed a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’” Chrysler Corp. v. Brown, 441 U.S. 281,
310, 99 S. Ct. 1705, 1722, 60 L. Ed. 2d 208 (1979).
Not all would agree. See, for example, Judge Hodge’s conclusion to the contrary in the Eastern District of Pennsylvania. I do, however, think that Judge Brown has the better argument, and one that finds support in serious scholarly treatment of the issue by administrative-law scholars like Thomas Merrill (here with Kathryn Tongue Watts in the Harvard Law Review and here in the Administrative Law Review) and Richard Pierce (here).
Judge Brown also concluded that the rule is arbitrary and capricious, in violation of the Administrative Procedure Act (APA). The gravamen of her complaint here was not that there were no grounds on which the FTC might intervene against noncompete terms; rather, it was the misfit between the rule’s extremely broad scope and its foundations in the piecemeal and mixed literature, and the FTC’s very recent and limited enforcement experience with such terms. That is, even if the FTC does have authority to adopt some substantive-competition rules, it violated the APA in adopting the rule that it did.
While Judge Corrigan had also ruled that the FTC lacks the authority to adopt such a sweeping rule, his determination cited a different legal ground: the major questions doctrine described by the Supreme Court in, notably (and recently), West Virginia v. EPA and Biden v. Nebraska. As Corrigan put it, quoting West Virginia (we have no written opinion, but there is a transcript of his decision, which was read from the bench):
The major questions doctrine is the name recently given to a long-standing principle governing the interpretation of statutes conferring power on administrative agencies. The principle is this: When an agency claims to have the power to issue rules of “extraordinary . . . economic and political significance,” it must “point to ‘clear congressional authorization’ for the power it claims.”
Based on factors that included the FTC’s own estimates of the rule’s (purportedly) likely economic impact; the novelty of the FTC’s intervention (“the fact that the Commission has never tried substantive rulemaking of this magnitude before this and had never even brought non-compete enforcement actions until it announced some consent decrees literally the day before it announced its Notice of Proposed Rulemaking”) and ongoing political debates about noncompetes (both in Congress, and through “long history of both common law of contracts and increasingly a statutory overlay that regulates non-competes at the state level”), Corrigan determined that:
on balance, given the sweep and the breadth of the final rule, including its application to existing contracts, I find it substantially likely — and the plaintiffs have shown me this — that it presents a major question as defined by the Supreme Court.
Contra Judge Brown’s decision, Corrigan thought it a “close question” whether Section 6(g) of the FTC Act conferred some substantive competition-rulemaking authority on the commission. On that question, he noted that the plaintiff had made “a plausible case.” Nonetheless, he sided with Judge Hodge in Pennsylvania in concluding that “the various components of the statute show Congress conferred at least some form of substantive rulemaking authority to the FTC with regard to unfair methods of competition.”
Judge Corrigan did not rule on whether the rule in question violated the APA, noting that the plaintiff before him had not alleged that the rule was arbitrary and capricious.
Judge Hodge, as noted above, ruled in favor of the FTC. Reviewing the statutory language, structure, and history, she did not think it a close question (as did Corrigan) or a limited grant of authority to adopt “housekeeping rules.” Rather:
When taken in the context of the goal of the Act and the FTC’s purpose, the Court finds it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.
There is, to be fair, a colorable argument in favor of the FTC’s regulatory authority, one finding some support in the language of the FTC Act and in the U.S. Circuit Court for the D.C. Circuit’s 1973 opinion in National Petroleum Refiners v. FTC. And as Judge Hodge noted, “[t] he plain text of the statute provides no express limitations on the FTC’s rulemaking authority.”
National Petroleum Refiners is a hoary case and, as Richard Pierce put it, “[t] he method of statutory interpretation that the D.C. Circuit used in National Petroleum Refiners was used by several circuits in the 1970s. It was never embraced by the Supreme Court, however, and no court has used it in decades.” Still, it has never been overruled.
I won’t recapitulate all the reasons for thinking that Judge Brown’s statutory construction is more persuasive. For details, see, e.g., Merrill, Pierce, and, for that matter, a thoughtful dissent to the rule’s adoption by Commissioner Melissa Holyoak, in which she was joined by Commissioner Andrew Ferguson.
I will note, however, one very odd part of Judge Hodge’s otherwise defensible (if not persuasive) opinion. She notes that Section 5 of the FTC Act empowers and directs the FTC to “prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce.”
And so it does.
She goes on to reason that “prevent” is forward-looking, charging the “FTC to take action to avoid or avert a future occurrence in addition to remediating or stopping past harm.”
Still fine.
Then it gets strained, if not strange:
Plaintiff asks the Court to cabin the FTC’s power as solely adjudicatory, and therefore reactionary and backward-looking, only arising once unfair methods of competition have already occurred. The Court declines to do so. If the Court adopts ATS’s interpretation of the Act, it would limit the FTC’s power to only responsive or remedial methods of addressing unfair methods of competition through adjudication, which is inherently at odds with the ordinary interpretation of the word “prevent.”
First, why? The FTC routinely screens proposed mergers under both the Clayton Act and Section 5 of the FTC Act. When the commission believes that a merger would harm competition and consumers, it can file a complaint alleging one or more likely violations of both Section 5 of the FTC Act and Section 7 of the Clayton Act. Commonly, such complaints are heard before the commission itself, in a trial-like administrative (“part 3”) process, although they can be heard in federal court instead. In either case, the FTC typically seeks a preliminary injunction in federal court, seeking to enjoin the merger pending resolution of the matter on the merits.
For example, in Phoebe Putney:
The Federal Trade Commission (FTC) . . . issued an administrative complaint alleging that the proposed purchase-and-lease transaction would create a virtual monopoly and would substantially reduce competition in the market for acute-care hospital services, in violation of §5 of the Federal Trade Commission Act . . . and §7 of the Clayton Act. (emphasis added)
In that matter, a unanimous Court sustained the FTC’s authority to scrutinize the merger against a “state action doctrine” challenge, noting that, as an initial matter, the court below (the 11th Circuit) had found that, on the facts alleged, the merger “would substantially lessen competition or tend to create, if not create, a monopoly.”
Across administrations, the commission has filed dozens of merger challenges annually (for example, 28 in fiscal year 2020), and I am aware of no federal court opinion holding (or even a law review article arguing) that Section 5 is inapposite because the powers it grants the agency are “solely adjudicatory, and therefore reactionary and backward-looking, only arising once unfair methods of competition have already occurred.” Standards of proof have evolved, but in merger cases, the question has always been whether a proposed merger has a “probable anticompetitive effect,” or whether harm to competition is “reasonably probable.” See Brown Shoe, General Dynamics, FTC v. Procter and Gamble, Baker Hughes, etc., etc. That’s true whether the FTC brings a case under both the FTC Act and the Clayton Act, or another enforcer (or private plaintiff) litigates under Section 7 alone.
Conduct matters, too, may be initiated before competitive harms have come to fruition. As a more general point, it seems fundamentally odd—and at odds with a basic understanding of law enforcement—to suggest that ex post enforcement actions have no effect on third-party behavior ex ante. That is true of both civil and criminal law enforcement, and it is hardly restricted to antitrust.
What about the matter of a single district court vacating a federal regulation on a nationwide basis? One might (or might not) object on a policy basis, but the statutory language seems clear enough. Section 705 of the APA authorizes federal courts to stay enforcement of a rule pending judicial review; and Section 706 gives reviewing courts the power to “set aside agency action, findings, and conclusions” that are found to be unlawful.
While there has been some fuss over the question of whether lower courts can issue equitable injunctions that operate nationwide, beyond their jurisdiction, with regard to vacatur—as per the decisions in the Northern District of Texas and the Middle District of Florida—courts have uniformly held that invalid federal regulations can be subject to vacatur, and hence “set aside,” by reviewing courts under the APA. See, for example, the D.C. Circuit here and the 5th Circuit here.
That, presumably, explains the narrow injunctions issued by the courts in Texas and Florida prior to decisions on the merits. Having not yet held the rules to be improper, the courts enjoined enforcement, pending resolution on the merits, only for the named plaintiffs in their jurisdictions. Having now held that the FTC exceeded its authority in adopting the noncompete rule, Judge Brown was right to set it aside. The plaintiffs sought vacatur, and she granted it. One expects that Judge Corrigan will be similarly expansive, should he rule against the FTC on the merits.
So where are we? Based on the decisions thus far, and supposing that the Florida and Pennsylvania courts issue merits decisions consistent with their preliminary decisions, central issues for appeal include these:
- Does Section 6(g) of the FTC Act confer substantive or “legislative” competition rulemaking authority on the FTC?
- Was the FTC arbitrary and capricious in adopting the noncompete rule, given the specific provisions of the rule on the one hand, and the FTC’s rulemaking and enforcement record on the other?
- Does the FTC’s noncompete rule run afoul of the major questions doctrine, given the rule’s likely economic impact, novelty, and political importance, and given that Congress has not expressly charged the FTC with regulating restrictions on the terms of employment agreements generally or noncompete terms in particular?
As one of the respondents to Dan Crane’s poll put it:
The hard question here is probably not whether the FTC loses, it’s how it loses . . . There are so many ways to challenge the rule that the mind fairly reels. FTC rulemaking authority, unconstitutional removal protections, nondelegation, major questions doctrine, arbitrary & capricious, etc. Plus, the rule’s novelty makes it a ripe target.
One more note, in a July post, I suggested that the Supreme Court’s Loper Bright decision made it even less likely that the FTC’s regulation would be sustained:
It’s not entirely clear where the ground of statutory ambiguity will settle in the wake of Loper Bright, but it is clear that the ground has shifted, and that cannot bode well for the FTC’s noncompete rule. West Virginia v EPA and the Major Questions Doctrine (MQD) aside (and that’s no small aside), the question whether the FTC has the authority to issue substantive or “legislative” competition regulations is a matter of some controversy.
Judge Brown took note, too.
I’m not certain how this will all play out. And I’m not certain of the timetable. But I doubt that the FTC’s rule will survive, and if the rule goes, the agency’s claim to competition-rulemaking authority may go with it.
