Archives For labor markets

Why I’m a Skeptic of a Noncompete Ban

Brian Albrecht —  24 January 2023

Under a recently proposed rule, the Federal Trade Commission (FTC) would ban the use of noncompete terms in employment agreements nationwide. Noncompetes are contracts that workers sign saying they agree to not work for the employer’s competitors for a certain period. The FTC’s rule would be a major policy change, regulating future contracts and retroactively voiding current ones. With limited exceptions, it would cover everyone in the United States.

When I scan academic economists’ public commentary on the ban over the past few weeks (which basically means people on Twitter), I see almost universal support for the FTC’s proposed ban. You see similar support if you expand to general econ commentary, like Timothy Lee at Full Stack Economics. Where you see pushback, it is from people at think tanks (like me) or hushed skepticism, compared to the kind of open disagreement you see on most policy issues.

The proposed rule grew out of an executive order by President Joe Biden in 2021, which I wrote about at the time. My argument was that there is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other.

Somehow, reposting my newsletter on the economic rationale for noncompetes has turned me into a “pro-noncompete guy” on Twitter.

The discussions have been disorienting. I feel like I’m taking crazy pills! If you ask me, “what new thing should policymakers do to address labor market power?” I would probably say something about noncompetes! Employers abuse them. The stories are devastating about people unable to find a new job because noncompetes bind them.

Yet, while recognizing the problems with noncompetes, I do not support the complete ban.

That puts me out of step with most vocal economics commentators. Where does this disagreement come from? How do I think about policy generally, and why am I the odd one out?

My Interpretation of the Research

One possibility is that I’m not such a lonely voice, and that the sample of vocal Twitter users is biased toward particular policy views. The University of Chicago Booth School of Business’ Initiative on Global Markets recently conducted a poll of academic economists  about noncompetes, which mostly finds differing opinions and levels of certainty about the effects of a ban. For example, 43% were uncertain that a ban would generate a “substantial increase in wages in the affected industries.” However, maybe that is because the word substantial is unclear. That’s a problem with these surveys.

Still, more economists surveyed agreed than disagreed. I would answer “disagree” to that statement, as worded.

Why do I differ? One cynical response would be that I don’t know the recent literature, and my views are outdated. From the research I’ve done for a paper that I’m writing on labor-market power, I’m fairly well-versed in the noncompete literature. I don’t know it better than the active researchers in the field, but better than the average economists responding to the FTC’s proposal and definitely better than most lawyers. My disagreement also isn’t about me being some free-market fanatic. I’m not, and some other free-market types are skeptical of noncompetes. My priors are more complicated (critics might say “confused”) than that, as I will explain below.

After much soul-searching, I’ve concluded that the disagreement is real and results from my—possibly weird—understanding of how we should go from the science of economics to the art of policy. That’s what I want to explain today and get us to think more about.

Let’s start with the literature and the science of economics. First, we need to know “the facts.” The original papers focused a lot on collecting data and facts about noncompetes. We don’t have amazing data on the prevalence of noncompetes, but we know something, which is more than we could say a decade ago. For example, Evan Starr, J.J. Prescott, & Norman Bishara (2021) conducted a large survey in which they found that “18 percent of labor force participants are bound by noncompetes, with 38 percent having agreed to at least one in the past.”[1] We need to know these things and thank the researchers for collecting data.

With these facts, we can start running regressions. In addition to the paper above, many papers develop indices of noncompete “enforceability” by state. Then we can regress things like wages on an enforceability index. Many papers—like Starr, Prescott, & Bishara above—run cross-state regressions and find that wages are higher in states with higher noncompete enforceability. They also find more training with noncompete enforceability. But that kind of correlation is littered with selection issues. High-income workers are more likely to sign noncompetes. That’s not causal. The authors carefully explain this, but sometimes correlations are the best we have—e.g., if we want to study noncompetes on doctors’ wages and their poaching of clients.

Some people will simply point to California (which has banned noncompetes for decades) and say, “see, noncompete bans don’t destroy an economy.” Unfortunately, many things make California unique, so while that is evidence, it’s hardly causal.

The most credible results come from recent changes in state policy. These allow us to run simple difference-in-difference types of analysis to uncover causal estimates. These results are reasonably transparent and easy to understand.

Michael Lipsitz & Evan Starr (2021) (are you starting to recognize that Starr name?) study a 2008 Oregon ban on noncompetes for hourly workers. They find the ban increased hourly wages overall by 2 to 3%, which implies that those signing noncompetes may have seen wages rise as much as 14 to 21%. This 3% number is what the FTC assumes will apply to the whole economy when they estimate a $300 billion increase in wages per year under their ban. It’s a linear extrapolation.

Similarly, in 2015, Hawaii banned noncompetes for new hires within tech industries. Natarajan Balasubramanian et al. (2022) find that the ban increased new-hire wages by 4%. They also estimate that the ban increased worker mobility by 11%. Labor economists generally think of worker turnover as a good thing. Still, it is tricky here when the whole benefit of the agreement is to reduce turnover and encourage a better relationship between workers and firms.

The FTC also points to three studies that find that banning noncompetes increases innovation, according to a few different measures. I won’t say anything about these because you can infer my reaction based on what I will say below on wage studies. If anything, I’m more skeptical of innovation studies, simply because I don’t think we have a good understanding of what causes innovation generally, let alone how to measure the impact of noncompetes on innovation. You can read what the FTC cites on innovation and make up your own mind.

From Academic Research to an FTC Ban

Now that we understand some of the papers, how do we move to policy?

Let’s assume I read the evidence basically as the FTC does. I don’t, and will explain as much in a future paper, but that’s not the debate for this post. How do we think about the optimal policy response, given the evidence?

There are two main reasons I am not ready to extrapolate from the research to the proposed ban. Every economist knows them: the dreaded pests of external validity and general equilibrium effects.

Let’s consider external validity through the Oregon ban paper and the Hawaii tech ban paper. Again, these are not critiques of the papers, but of how the FTC wants to move from them to a national ban.

Notice above that I said the Oregon ban went into effect in 2008, which means it happened as the whole country was entering a major recession and financial crisis. The authors do their best to deal with differential responses to the recession, but every state in their data went through a recession. Did the recession matter for the results? It seems plausible to me.

Another important detail about the Oregon ban is that it only applied to hourly workers, while the FTC rule would apply to all workers. You can’t just confidently assume hourly workers are just like salaried workers. Hourly workers who sign noncompetes are less likely to read them, less likely to consult with their family about them, and less likely to negotiate over them. If part of the problem with noncompetes is that people don’t understand them until it is too late, you will overstate the harm if you just look at hourly workers who understand noncompetes even less than salaried workers. Also, with a partial ban, Lipsitz & Starr recognize that spillovers matter and firms respond in different ways, such as converting workers to salaried to keep the noncompete, which won’t exist with a national ban. It’s not the same experiment at a national scale. Which way will it change? How confident are we?

The effects of the Hawaii ban are likely not the same as the FTC one would be. First of all, Hawaii is weird. It has a small population, and tech is a small part of the state’s economy. The ban even excluded telecom from within the tech sector. We are talking about a targeted ban. What does the Hawaii experiment tell us about a ban on noncompetes for tech workers in a non-island location like Boston? What does it tell us about a national ban on all noncompetes, like the FTC is proposing? Maybe these things do not matter. To further complicate things, the policy change included a ban on nonsolicitation clauses. Maybe the nonsolicitation clause was unimportant. But I’d want more research and more policy experimentation to tease out these details.

As you dig into these papers, you find more and more of these issues. That’s not a knock on the papers but an inherent difficulty in moving from research to policy. It’s further compounded by the fact that this empirical literature is still relatively new.

What will happen when we scale these bans up to the national level? That’s a huge question for any policy change, especially one as large as a national ban. The FTC seems confident in what will happen, but moving from micro to macro is not trivial. Macroeconomists are starting to really get serious about how the micro adds up to the macro, but it takes work.

I want to know more. Which effects are amplified when scaled? Which effects drop off? What’s the full National Income and Product Accounts (NIPA) accounting? I don’t know. No one does, because we don’t have any of that sort of price-theoretic, general equilibrium research. There are lots of margins that firms will adjust on. There’s always another margin that firms will adjust that we are not capturing. Instead, what the FTC did is a simple linear extrapolation from the state studies to a national ban. Studies find a 3% wage effect here. Multiply that by the number of workers.

When we are doing policy work, we would also like some sort of welfare analysis. It’s not just about measuring workers in isolation. We need a way to think about the costs and benefits and how to trade them off. All the diff-in-diff regressions in the world won’t get at it; we need a model.

Luckily, we have one paper that blends empirics and theory to do welfare analysis.[2] Liyan Shi has a paper forthcoming in Econometrica—which is no joke to publish in—titled “Optimal Regulation of Noncompete Contracts.” In it, she studies a model meant to capture the tradeoff between encouraging a firm’s investment in workers and reducing labor mobility. To bring the theory to data, she scrapes data on U.S. public firms from Securities and Exchange Commission filings and merges those with firm-level data from Compustat, plus some others, to get measures of firm investment in intangibles. She finds that when she brings her model to the data and calibrates it, the optimal policy is roughly a ban on noncompetes.

It’s an impressive paper. Again, I’m unsure how much to take from it to extrapolate to a ban on all workers. First, as I’ve written before, we know publicly traded firms are different from private firms, and that difference has changed over time. Second, it’s plausible that CEOs are different from other workers, and the relationship between CEO noncompetes and firm-level intangible investment isn’t identical to the relationship between mid-level engineers and investment in that worker.

Beyond particular issues of generalizing Shi’s paper, the larger concern is that this is the paper that does a welfare analysis. That’s troubling to me as a basis for a major policy change.

I think an analogy to taxation is helpful here. I’ve published a few papers about optimal taxation, so it’s an area I’ve thought more about. Within optimal taxation, you see this type of paper a lot. Here’s a formal model that captures something that theorists find interesting. Here’s a simple approach that takes the model to the data.

My favorite optimal-taxation papers take this approach. Take this paper that I absolutely love, “Optimal Taxation with Endogenous Insurance Markets” by Mikhail Golosov & Aleh Tsyvinski.[3] It is not a price-theory paper; it is a Theory—with a capital T—paper. I’m talking lemmas and theorems type of stuff. A bunch of QEDs and then calibrate their model to U.S. data.

How seriously should we take their quantitative exercise? After all, it was in the Quarterly Journal of Economics and my professors were assigning it, so it must be an important paper. But people who know this literature will quickly recognize that it’s not the quantitative result that makes that paper worthy of the QJE.

I was very confused by this early in my career. If we find the best paper, why not take the result completely seriously? My first publication, which was in the Journal of Economic Methodology, grew out of my confusion about how economists were evaluating optimal tax models. Why did professors think some models were good? How were the authors justifying that their paper was good? Sometimes papers are good because they closely match the data. Sometimes papers are good because they quantify an interesting normative issue. Sometimes papers are good because they expose an interesting means-ends analysis. Most of the time, papers do all three blended together, and it’s up to the reader to be sufficiently steeped in the literature to understand what the paper is really doing. Maybe I read the Shi paper wrong, but I read it mostly as a theory paper.

One difference between the optimal-taxation literature and the optimal-noncompete policy world is that the Golosov & Tsyvinski paper is situated within 100 years of formal optimal-taxation models. The knowledgeable scholar of public economics can compare and contrast. The paper has a lot of value because it does one particular thing differently than everything else in the literature.

Or think about patent policies, which was what I compared noncompetes to in my original post. There is a tradeoff between encouraging innovation and restricting monopoly. This takes a model and data to quantify the trade-off. Rafael Guthmann & David Rahman have a new paper on the optimal length of patents that Rafael summarized at Rafael’s Commentary. The basic structure is very similar to the Shi or Golosov &Tsyvinski papers: interesting models supplemented with a calibration exercise to put a number on the optimal policy. Guthmann & Rahman find four to eight years, instead of the current system of 20 years.

Is that true? I don’t know. I certainly wouldn’t want the FTC to unilaterally put the number at four years because of the paper. But I am certainly glad for their contribution to the literature and our understanding of the tradeoffs and that I can position that number in a literature asking similar questions.

I’m sorry to all the people doing great research on noncompetes, but we are just not there yet with them, by my reading. For studying optimal-noncompete policy in a model, we have one paper. It was groundbreaking to tie this theory to novel data, but it is still one welfare analysis.

My Priors: What’s Holding Me Back from the Revolution

In a world where you start without any thoughts about which direction is optimal (a uniform prior) and you observe one paper that says bans are net positive, you should think that bans are net positive. Some information is better than none and now you have some information. Make a choice.

But that’s not the world we live in. We all come to a policy question with prior beliefs that affect how much we update our beliefs.

For me, I have three slightly weird priors that I will argue you should also have but currently place me out of step with most economists.

First, I place more weight on theoretical arguments than most. No one sits back and just absorbs the data without using theory; that’s impossible. All data requires theory. Still, I think it is meaningful to say some people place more weight on theory. I’m one of those people.

To be clear, I also care deeply about data. But I write theory papers and a theory-heavy newsletter. And I think these theories matter for how we think about data. The theoretical justification for noncompetes has been around for a long time, as I discussed in my original post, so I won’t say more.

The second way that I differ from most economists is even weirder. I place weight on the benefits of existing agreements or institutions. The longer they have been in place, the more weight I place on the benefits. Josh Hendrickson and I have a paper with Alex Salter that basically formalized the argument from George Stigler that “every long-lasting institution is efficient.” When there are feedback mechanisms, such as with markets or democracy, the resulting institutions are the result of an evolutionary process that slowly selects more and more gains from trade. If they were so bad, people would get rid of them eventually. That’s not a free-market bias, since it also means that I think something like the Medicare system is likely an efficient form of social insurance and intertemporal bargaining for people in the United States.

Back to noncompetes, many companies use noncompetes in many different contexts. Many workers sign them. My prior is that they do so because a noncompete is a mutually beneficial contract that allows them to make trades in a world with transaction costs. As I explained in a recent post, Yoram Barzel taught us that, in a world with transaction costs, people will “erect social institutions to impose and enforce the restraints.”

One possible rebuttal is that noncompetes, while existing for a long time, have only become common in the past few decades. That is not very long-lasting, and so the FTC ban is a natural policy response to a new challenge that arose and the discovery that these contracts are actually bad. That response would persuade me more if this were a policy response brought about by a democratic bargain instead of an ideological agenda pushed by the chair of the FTC, which I think is closer to reality. That is Earl Thompson and Charlie Hickson’s spin on Stigler’s efficient institutions point. Ideology gets in the way.

Finally, relative to most economists, I place more weight on experimentation and feedback mechanisms. Most economists still think of the world through the lens of the benevolent planner doing a cost-benefit analysis. I do that sometimes, too, but I also think we need to really take our own informational limitations seriously. That’s why we talk about limited information all the time on my newsletter. Again, if we started completely agnostic, this wouldn’t point one way or another. We recognize that we don’t know much, but a slight signal pushes us either way. But when paired with my previous point about evolution, it means I’m hesitant about a national ban.

I don’t think the science is settled on lots of things that people want to tell us the science is settled on. For example, I’m not convinced we know markups are rising. I’m not convinced market concentration has skyrocketed, as others want to claim.

It’s not a free-market bias, either. I’m not convinced the Jones Act is bad. I’m not convinced it’s good, but Josh has convinced me that the question is complicated.

Because I’m not ready to easily say the science is settled, I want to know how we will learn if we are wrong. In a prior Truth on the Market post about the FTC rule, I quoted Thomas Sowell’s Knowledge and Decisions:

In a world where people are preoccupied with arguing about what decision should be made on a sweeping range of issues, this book argues that the most fundamental question is not what decision to make but who is to make it—through what processes and under what incentives and constraints, and with what feedback mechanisms to correct the decision if it proves to be wrong.

A national ban bypasses this and severely cuts off our ability to learn if we are wrong. That worries me.

Maybe this all means that I am too conservative and need to be more open to changing my mind. Maybe I’m inconsistent in how I apply these ideas. After all, “there’s always another margin” also means that the harm of a policy will be smaller than anticipated since people will adjust to avoid the policy. I buy that. There are a lot more questions to sort through on this topic.

Unfortunately, the discussion around noncompetes has been short-circuited by the FTC. Hopefully, this post gave you tools to think about a variety of policies going forward.

[1] The U.S. Bureau of Labor Statistics now collects data on noncompetes. Since 2017, we’ve had one question on noncompetes in the National Longitudinal Survey of Youth 1997. Donna S. Rothstein and Evan Starr (2021) also find that noncompetes cover around 18% of workers. It is very plausible this is an understatement, since noncompetes are complex legal documents, and workers may not understand that they have one.

[2] Other papers combine theory and empirics. Kurt Lavetti, Carol Simon, & William D. White (2023), build a model to derive testable implications about holdups. They use data on doctors and find noncompetes raise returns to tenure and lower turnover.

[3] It’s not exactly the same. The Golosov & Tsyvinski paper doesn’t even take the calibration seriously enough to include the details in the published version. Shi’s paper is a more serious quantitative exercise.

In Antitrust & Competition, Economic Theory, Exclusionary Conduct, Federal Trade Commission, Section 5, Truth on the Market , , ,
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The FTC’s Noncompete Rule: Shouldn’t Doesn’t Mean Can’t, but Maybe It Should

Gus Hurwitz —  13 January 2023

Former U.S. Labor Secretary Gene Scalia games out the future of the Federal Trade Commission’s (FTC) recently proposed rule that would ban the use of most noncompete clauses in today’s Wall Street Journal. He writes that: 

The Federal Trade Commission’s ban on noncompete agreements may be the most audacious federal rule ever proposed. If finalized, it would outlaw terms in 30 million contracts and pre-empt laws in virtually every state. It would also, by the FTC’s own account, reduce capital investment, worker training and possibly job growth, while increasing the wage gap. The commission says the rule would deliver a meager 2.3% wage increase for hourly workers, versus a 9.4% increase for CEOs.

Three phases lie ahead for the proposal: rule-making, litigation and compliance. … The FTC is likely to finalize the rule within a year, to ensure the Biden administration can begin the task of defending it in the litigation phase. The proposal’s legal vulnerabilities are legion. …

Sketching the likely future of the proposed rule in this way is helpful. Most of those affected by this rule are unlikely to be familiar with the rulemaking process or the judicial process for reviewing agency rules; indeed, many are likely to hear coverage of the proposed rule and mistake it for a regulation that’s already in effect. The cost of that confusion is made clear by Scalia’s ultimate takeaway: that the courts are very likely to reject the rule (and perhaps the FTC’s authority to adopt these types of competition rules), but only after a protracted and lengthy judicial review process (including, quite possibly, a trip to the U.S. Supreme Court).

As Scalia explains, many employers will act upon this likely ill-fated rule out of fear or confusion, altering their employment contacts in ways that will be hard to later amend: 

Unfortunately, some employers may now reduce the benefits they offer in exchange for noncompetes, for fear the rule may eventually render the agreement unenforceable. But because the FTC may change aspects of the rule—and because the courts are likely to invalidate it—American businesses don’t need to invest now in complying with this deeply flawed proposal.

This should raise serious concern about the FTC’s approach to this issue. It is very likely that the Commission is aware of the rocky shoals that lie ahead. But it is also likely that the Commission knows that its posturing will affect the conduct of the business community. It’s not much of a leap to conclude that the Commission—that is, its three-member majority—is using its rulemaking process, not its substantive legal authority, as a norm entrepreneur, to jawbone the business community and move the Overton window that frames discussion of noncompete clauses. I feel dirty writing a sentence as jargon-filled as that one, but no dirtier than the Commission should feel for abusing rulemaking procedures to achieve substantive ends beyond its legal authority.

This concern resembles an issue currently before the Supreme Court: Axon Enterprises v. FTC, another case that involves the FTC. Generally, agency actions cannot be challenged in federal court until the agency has finalized its action and affected parties have exhausted their appeals before the agency. Indeed, the statutes that govern some agencies (including the FTC) have provisions that have been interpreted as preventing challenges to the agency’s authority from being brought before a federal district court.

In Axon, the Supreme Court is considering whether a company subject to administrative proceedings before the Commission can challenge the constitutionality of those proceedings in district court prior to their completion. Oral arguments were heard this past November and, while reading tea leaves based upon oral arguments is a fraught endeavor, those arguments did not seem to go well for the FTC. It seems likely that the Court will allow firms to raise such challenges prior to final agency action in adjudication, precisely because not allowing them allows the Commission to cause non-redressable harms to the firms it investigates; several years of unconstitutional litigation can be devastating to a business.

The Axon case involves adjudication against a single firm, which raises some different issues from those raised when an agency is developing rules that will affect an entire industry. Most notably, constitutional Due Process protections are implicated when the government takes action against a single firm. It is unlikely that the outcome in Axon—even if as adverse to the FTC as foreseeably possible—would extend to allow firms to challenge an agency rulemaking process on the ground that it exceeds the agency’s statutory (not even constitutional) authority.

But the Commission should nonetheless take the concerns at issue in Axon to heart. If the Supreme Court rules against the Commission in Axon, it will be a strong signal that the Court has concerns about how the Commission is using the authority that Congress has given it. One could even say that it will be the latest in a series of such signals, given that the Court recently struck down the Commission’s Section 13(b) civil-penalty authority. As Scalia notes, the Commission is already pushing the outermost limits of its statutory authority with the rule that it has proposed. The extent of the coming judicial (or congressional) rebuke will be greatly expanded if the courts feel that the agency has abused the rulemaking process to achieve substantive goals that exceed that outermost limit.

In Antitrust & Competition, Federal Trade Commission, Section 5, Truth on the Market , , , , , ,
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Biweekly FTC Roundup: Highly Skilled Sandwich Maker Edition

Daniel Gilman —  12 January 2023

Happy New Year? Right, Happy New Year! 

The big news from the Federal Trade Commission (FTC) is all about noncompetes. From what were once the realms of labor and contract law, noncompetes are terms in employment contracts that limit in various ways the ability of an employee to work at a competing firm after separation from the signatory firm. They’ve been a matter of increasing interest to economists, policymakers, and enforcers for several reasons. For one, there have been prominent news reports of noncompetes used in dubious places; the traditional justifications for noncompetes seem strained when applied to low-wage workers, so why are we reading about noncompetes binding sandwich-makers at Jimmy John’s? 

For another, there’s been increased interest in the application of antitrust to labor markets more generally. One example among many: a joint FTC/U.S. Justice Department workshop in December 2021.

Common-law cases involving one or another form of noncompete go back several hundred years. So, what’s new? First, on Jan. 4, the FTC announced settlements with three firms regarding their use of noncompetes, which the FTC had alleged to violate Section 5. These are consent orders, not precedential decisions. The complaints were, presumably, based on rule-of-reason analyses of facts, circumstances, and effects. On the other hand, the Commission’s recent Section 5 policy statement seemed to disavow the time-honored (and Supreme-Court-affirmed) application of the rule of reason. I wrote about it here, and with Gus Hurwitz here. My ICLE colleagues Dirk Auer, Brian Albrecht, and Jonathan Barnett did too, among others. 

The Commission’s press release seemed awfully general:

Noncompete restrictions harm both workers and competing businesses. For workers, noncompete restrictions lead to lower wages and salaries, reduced benefits, and less favorable working conditions. For businesses, these restrictions block competitors from entering and expanding their businesses.

Always? Distinct facts and circumstances? Commissioner Christine Wilson noted the brevity of the statement in her dissent: 

…each Complaint runs three pages, with a large percentage of the text devoted to boilerplate language. Given how brief they are, it is not surprising that the complaints are woefully devoid of details that would support the Commission’s allegations. In short, I have seen no evidence of anticompetitive effects that would give me reason to believe that respondents have violated Section 5 of the FTC Act. 

She did not say that the noncompetes were fine. In a separate statement regarding one of the matters, she noted that various aspects of noncompetes imposed on security guards (running two years from termination of employment, with $10,000 liquidated damages for breach) had been found unreasonable by a state court, and therefore unenforceable under Michigan law. That seemed to her “reasonable.” I’m no expert on Michigan state law, but those terms seem to me suspect under general standards of reasonability. Whether there was a federal antitrust violation is far less clear.    

One more clue–and even bigger news–came the very next day: the Commission published a notice of proposed rulemaking (NPRM) proposing to ban the use of noncompetes in general. Subject to a limited exception for the sale of a business, noncompetes would be deemed violative of Section 5 across occupations, income levels, and industries. That is, the FTC proposed to regulate the terms of employment agreements for nearly the whole of the U.S. labor force. Step aside federal and state labor law (and the U.S. Labor Department and Congress); and step aside ongoing and active statutory experimentation on noncompete enforcement in the states. 

So many questions. There are reasons to wonder about many noncompetes. They do have the potential to solve holdup problems for firms that might otherwise underinvest in employee training and might undershare trade secrets or other proprietary information. But that’s not much of an explanation for restrictions on a counter person at a sub shop, and I’m pretty suspicious of the liquidated damages provision in the security-guards matter. Credible economic studies raise concerns, as well. 

Still, this is an emerging area of study, and many positive contributions to it (like the one linked just now, and this) illustrate research challenges that remain. An FTC Bureau of Economics working paper (oddly not cited in the 215-page NPRM) reviews the body of literature, observing that results are mixed, and that many of the extant studies have shortcomings. 

For similar reasons, comments submitted to an FTC workshop on noncompetes by the Antitrust Section of the American Bar Association said that cross-state variations in noncompete law “are seemingly justified, as the views and literature on non-compete clauses (and restrictive covenants in employment contracts generally) are mixed.”

So here are a few more questions that cannot possibly be resolved in a single blog post:

  1. Does the FTC have the authority to issue substantive (“legislative”) competition regulations? 
  2. Would a regulation restricting a common contracting practice across all occupations, industries, and income levels raise the major questions doctrine? (Ok, skipping ahead: Yes.)
  3. Does it matter, for the major questions doctrine or otherwise, that there’s a substantial body of federal statutory law regarding labor and employment and a federal agency (a good deal larger than the FTC) charged to enforce the law?
  4. Does it matter that the FTC simply doesn’t have the personnel (or congressionally appropriated budget) to enforce such a sweeping regulation?
    • Is the number of experienced labor lawyers currently employed as staff in the FTC’s Bureau of Competition nonzero? If so, what is it? 
  5. Does it matter that this is an active area of state-level legislation and enforcement?
  6. Do the effects of noncompetes vary as the terms of noncompetes vary, as suggested in the ABA comments linked above? And if so, on what dimensions?
    • Do the effects vary according to the market power of the employer in local (or other geographically relevant) labor markets and, if so, should that matter to an antitrust enforcer?
    • If the effects vary significantly, is a one-size-fits-all regulation the best path forward?
  7. Many published studies seem to report average effects of policy changes on, e.g., wages or worker mobility for some class of workers. Should we know more about the distribution of those effects before the FTC (or anyone else) adopts uniform federal regulations? 
  8. How well do we know the answer to the myriad questions raised by noncompetes? As the FTC working paper observes, many published studies seem to rely heavily on survey evidence on the incidence of noncompetes. Prior to adopting  a sweeping competition regulation, should the FTC use its 6b subpoena authority to gather direct evidence? Why hasn’t it?
  9. The FTC’s Bureau of Economics employs a large expert staff of research economists. Given the questions raised by the FTC Working Paper, how else might the FTC contribute to the state of knowledge of noncompete usage and effects before adopting a sweeping, nationwide prohibition? Are there lacunae in the literature that the FTC could fill? For example, there seem to be very few papers regarding the downstream effects on consumers, which might matter to consumers. And while we’re in labor markets, what about the relationship between noncompetes and employment? 

Well, that’s a lot. In my defense, I’ll  note that the FTC’s November 2022 Advance Notice of Proposed Rulemaking on “commercial surveillance” enumerated 95 complex questions for public comment. Which is more than nine. 

I didn’t even get to the once-again dismal ratings of FTC’s senior agency leadership in the 2022 OPM Federal Employee Viewpoint Survey. Last year’s results were terrible—a precipitous drop from 2020. This year’s results were worse. Worse yet, they show that last year’s results were not mere transient deflation in morale. But a discussion will have to wait for another blog post.

In Antitrust & Competition, Biweekly FTC Roundup, Exclusionary Conduct, Federal Trade Commission, Section 5, Truth on the Market, Vertical Restraints , , , , , ,
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The FTC’s NPRM on Noncompete Clauses: Flirting with Institutional Crisis

Alden Abbott —  10 January 2023

The Federal Trade Commission’s (FTC) Jan. 5 “Notice of Proposed Rulemaking on Non-Compete Clauses” (NPRMNCC) is the first substantive FTC Act Section 6(g) “unfair methods of competition” rulemaking initiative following the release of the FTC’s November 2022 Section 5 Unfair Methods of Competition Policy Statement. Any final rule based on the NPRMNCC stands virtually no chance of survival before the courts. What’s more, this FTC initiative also threatens to have a major negative economic-policy impact. It also poses an institutional threat to the Commission itself. Accordingly, the NPRMNCC should be withdrawn, or as a “second worst” option, substantially pared back and recast.

The NPRMNCC is succinctly described, and its legal risks ably summarized, in a recent commentary by Gibson Dunn attorneys: The proposal is sweeping in its scope. The NPRMNCC states that it “would, among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”

The Gibson Dunn commentary adds that it “would require employers to rescind all existing non-compete provisions within 180 days of publication of the final rule, and to provide current and former employees notice of the rescission.‎ If employers comply with these two requirements, the rule would provide a safe harbor from enforcement.”‎

As I have explained previously, any FTC Section 6(g) rulemaking is likely to fail as a matter of law. Specifically, the structure of the FTC Act indicates that Section 6(g) is best understood as authorizing procedural regulations, not substantive rules. What’s more, Section 6(g) rules raise serious questions under the U.S. Supreme Court’s nondelegation and major questions doctrines (given the breadth and ill-defined nature of “unfair methods of competition”) and under administrative law (very broad unfair methods of competition rules may be deemed “arbitrary and capricious” and raise due process concerns). The cumulative weight of these legal concerns “makes it highly improbable that substantive UMC rules will ultimately be upheld.

The legal concerns raised by Section 6(g) rulemaking are particularly acute in the case of the NPRMNCC, which is exceedingly broad and deals with a topic—employment-related noncompete clauses—with which the FTC has almost no experience. FTC Commissioner Christine Wilson highlights this legal vulnerability in her dissenting statement opposing issuance of the NPRMNCC.

As Andrew Mercado and I explained in our commentary on potential FTC noncompete rulemaking: “[a] review of studies conducted in the past two decades yields no uniform, replicable results as to whether such agreements benefit or harm workers.” In a comprehensive literature review made available online at the end of 2019, FTC economist John McAdams concluded that “[t]here is little evidence on the likely effects of broad prohibitions of non-compete agreements.” McAdams also commented on the lack of knowledge regarding the effects that noncompetes may have on ultimate consumers. Given these realities, the FTC would be particularly vulnerable to having a court hold that a final noncompete rule (even assuming that it somehow surmounted other legal obstacles) lacked an adequate factual basis, and thus was arbitrary and capricious.

The poor legal case for proceeding with the NPRMNCC is rendered even weaker by the existence of robust state-law provisions concerning noncompetes in almost every state (see here for a chart comparing state laws). Differences in state jurisprudence may enable “natural experimentation,” whereby changes made to state law that differ across jurisdictions facilitate comparisons of the effects of different approaches to noncompetes. Furthermore, changes to noncompete laws in particular states that are seen to cause harm, or generate benefits, may allow “best practices” to emerge and thereby drive welfare-enhancing reforms in multiple jurisdictions.

The Gibson Dunn commentary points out that, “[a]s a practical matter, the proposed [FTC noncompete] rule would override existing non-compete requirements and practices in the vast majority of states.” Unfortunately, then, the NPRMNCC would largely do away with the potential benefits of competitive federalism in the area of noncompetes. In light of that, federal courts might well ask whether Congress meant to give the FTC preemptive authority over a legal field traditionally left to the states, merely by making a passing reference to “mak[ing] rules and regulations” in Section 6(g) of the FTC Act. Federal judges would likely conclude that the answer to this question is “no.”

Economic Policy Harms

How much economic harm could an FTC rule on noncompetes cause, if the courts almost certainly would strike it down? Plenty.

The affront to competitive federalism, which would prevent optimal noncompete legal regimes from developing (see above), could reduce the efficiency of employment contracts and harm consumer welfare. It would be exceedingly difficult (if not impossible) to measure such harms, however, because there would be no alternative “but-for” worlds with differing rules that could be studied.

The broad ban on noncompetes predictably will prevent—or at least chill—the use of noncompete clauses to protect business-property interests (including trade secrets and other intellectual-property rights) and to protect value-enhancing investments in worker training. (See here for a 2016 U.S. Treasury Department Office of Economic Policy Report that lists some of the potential benefits of noncompetes.) The NPRMNCC fails to account for those and other efficiencies, which may be key to value-generating business-process improvements that help drive dynamic economic growth. Once again, however, it would be difficult to demonstrate the nature or extent of such foregone benefits, in the absence of “but-for” world comparisons.

Business-litigation costs would also inevitably arise, as uncertainties in the language of a final noncompete rule were worked out in court (prior to the rule’s legal demise). The opportunity cost of firm resources directed toward rule-related issues, rather than to business-improvement activities, could be substantial. The opportunity cost of directing FTC resources to wasteful noncompete-related rulemaking work, rather than potential welfare-enhancing endeavors (such as anti-fraud enforcement activity), also should not be neglected.

Finally, the substantial error costs that would attend designing and seeking to enforce a final FTC noncompete rule, and the affront to the rule of law that would result from creating a substantial new gap between FTC and U.S. Justice Department competition-enforcement regimes, merits note (see here for my discussion of these costs in the general context of UMC rulemaking).

Conclusion

What, then, should the FTC do? It should withdraw the NPRMNCC.

If the FTC is concerned about the effects of noncompete clauses, it should commission appropriate economic research, and perhaps conduct targeted FTC Act Section 6(b) studies directed at noncompetes (focused on industries where noncompetes are common or ubiquitous). In light of that research, it might be in position to address legal policy toward noncompetes in competition advocacy before the states, or in testimony before Congress.

If the FTC still wishes to engage in some rulemaking directed at noncompete clauses, it should consider a targeted FTC Act Section 18 consumer-protection rulemaking (see my discussion of this possibility, here). Unlike Section 6(g), the legality of Section 18 substantive rulemaking (which is directed at “unfair or deceptive acts or practices”) is well-established. Categorizing noncompete-clause-related practices as “deceptive” is plainly a nonstarter, so the Commission would have to bases its rulemaking on defining and condemning specified “unfair acts or practices.”

Section 5(n) of the FTC Act specifies that the Commission may not declare an act or practice to be unfair unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” This is a cost-benefit test that plainly does not justify a general ban on noncompetes, based on the previous discussion. It probably could, however, justify a properly crafted narrower rule, such as a requirement that an employer notify its employees of a noncompete agreement before they accept a job offer (see my analysis here).  

Should the FTC nonetheless charge forward and release a final competition rule based on the NPRMNCC, it will face serious negative institutional consequences. In the previous Congress, Sens. Mike Lee (R-Utah) and Chuck Grassley (R-Iowa) have introduced legislation that would strip the FTC of its antitrust authority (leaving all federal antitrust enforcement in DOJ hands). Such legislation could gain traction if the FTC were perceived as engaging in massive institutional overreach. An unprecedented Commission effort to regulate one aspect of labor contracts (noncompete clauses) nationwide surely could be viewed by Congress as a prime example of such overreach. The FTC should keep that in mind if it values maintaining its longstanding role in American antitrust-policy development and enforcement.

In Antitrust & Competition, Federal Trade Commission, Section 5, Supreme Court, Truth on the Market , , , , , , , , , ,
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Knowledge, Decisions, and Noncompetes

Brian Albrecht —  6 January 2023

One of my favorite books is Thomas Sowell’s Knowledge and Decisions, in which he builds on Friedrich Hayek’s insight that knowledge is dispersed throughout society. Hayek’s insight that markets can bring dispersed but important knowledge to bear with substantial effectiveness is one that many of us, especially economists, pay lip service to, but it often gets lost in day-to-day debates about policy. Sowell uses Hayek’s insight to understand and critique social, economic, and political institutions, which he judges in terms of “what kinds of knowledge can be brought to bear and with what effectiveness.” 

I’m reminded of Sowell in witnessing the current debate surrounding the Federal Trade Commission’s (FTC) proposed rule to enact a nationwide ban on noncompetes in employment agreements. A major policy change like this obviously sets off debate. Among economists, the discussion surrounds economic arguments and empirical evidence on the effects of noncompetes. Among lawyers, it largely centers on the legality of the rule.

But all of the discussion seems to ignore Sowell’s insights. He writes:

In a world where people are preoccupied with arguing about what decision should be made on a sweeping range of issues, this book argues that the most fundamental question is not what decision to make but who is to make it—through what processes and under what incentives and constraints, and with what feedback mechanisms to correct the decision if it proves to be wrong. (emphasis added)

Once we recognize that knowledge doesn’t simply exist out in the ether for us all to grab, but depends instead on the institutions within which we operate, the outcome is going to hinge on who gets to decide and how their knowledge evolves. How easily can the decision maker respond to new information and update their beliefs? How easily can they make incremental changes to incremental information?

To take two extremes, stock markets are institutions where decision makers take account of new information by the minute, allowing for rapid and marginal changes in decisions. At the other extreme is the Supreme Court, where precedents take years or decades to overturn if they are based on information that becomes outdated.

Let’s accept for the sake of argument that all of the best experts today agree that noncompetes are a net negative for society. We have to deal with the fact that we can be proven wrong in the future, and different regimes will deal with that future change differently.

If implemented, the FTC’s total ban of noncompetes replaces the decision making of businesses and workers, as well as the oversight of state governments, with a one-size-fits-all approach. Under that new regime, we need to ask: How quickly will they respond to new information—for example, that it had destructive implications? How easily can they make incremental changes?

One may hope the FTC, as an expert-led agency, could easily adjust to incoming evidence. They will just follow the science! But that response would be self-contradictory here. The FTC just showed that it is happy to go from 0 to 100 with its rules. It went from doing hardly any work on noncompetes to a total ban. In no optimal policy model where the benevolent regulator is responding to information is that how a regulator would process and act on information.

This is part of a long-run trend in politics. Sowell again:

Even within democratic nations, the locus of decision making has drifted away from the individual, the family, and voluntary associations of various sorts, and toward government. And within government, it has moved away from elected officials subject to voter feedback, and toward more insulated governmental institutions, such as bureaucracies and the appointed judiciary.

We may want that. Not every decision should be left up to the individual. We have rights and policies that constrain individuals. The U.S. Constitution, for example, doesn’t allow states to regulate interstate commerce. But the takeaway is not that decentralization is always better. Rather, the point is that we need to consider the tradeoff.

In Antitrust & Competition, Federal Trade Commission, Section 5, Truth on the Market , , , , , ,
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FTC Proposes Rule Deeming Non-Compete Clauses to be Unfair Methods of Competition

TOTM Admin —  6 January 2023

[The following was prepared as a Gibson Dunn client alert by Rachel Brass, Svetlana Gans, Kristen Limarzi, Ilissa Samplin, Katherine V. A. Smith, Stephen Weissman, Chris Wilson, Jamie France, and Connor Leydecker. It is reprinted with permission here.]

On Jan. 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) to prohibit employers from entering non-compete clauses with workers.[1] The proposed rule would extend to all workers, whether paid or unpaid, and would require companies to rescind existing non-compete agreements within 180 days of publication of the final rule.[2] The FTC will soon publish the NPRM in the Federal Register, triggering a 60-day public comment period.‎ The rule could be finalized by the end of the year; court challenges to the final rule are likely to follow.

The rule proposal follows recent FTC settlements with three companies and two individuals for allegedly illegal non-compete agreements imposed on workers—the first time the FTC has claimed that non-compete agreements constitute unfair methods of competition (UMC) under Section 5 of the FTC Act.‎

The Proposed Rule Would Broadly Ban Non-Compete Agreements

The proposed rule provides:

(a) Unfair methods of competition.  It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.‎[5]

The proposed rule broadly defines non-compete agreements as: “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”‎ It proposes a functional test to determine if a clause is a non-compete provision: to qualify, the provision would have “the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”‎ The proposed rule identifies two types of agreements that would constitute impermissible “non-competes”:

  • A nondisclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer; and
  • A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.‎

While the proposed rule would not expressly prohibit nondisclosure and intellectual-property agreements with employees, those agreements could be deemed impermissible non-competes if, pursuant to the provision excerpted above, they are deemed to be written “so broadly” that they “effectively preclude[ ] the worker from working in the same field.”‎ Further, the term “worker” would be defined as “a natural person who works, whether paid or unpaid, for an employer,” but would not include a franchisee in a franchisee/franchisor relationship.‎

Rescission Requirement, Safe Harbors, and Federal Preemption

The proposed rule would require employers to rescind all existing non-compete provisions within 180 days of publication of the final rule, and to provide current and former employees notice of the rescission.‎ If employers comply with these two requirements, the rule would provide a safe harbor from enforcement.‎ Further, the proposed rule would exempt from its scope certain non-competes entered in connection with the sale of businesses.‎ This exception also applies under California law, recognizing the need to protect the goodwill of a business.‎

The proposed rule would preempt all state and local rules inconsistent with its provisions, but not preempt State laws or regulations that provide greater protections.‎ As a practical matter, the proposed rule would override existing non-compete requirements and practices in the vast majority of states.

Concerned Parties Should Submit Public Comments

A 60-day public comment period will begin once the FTC publishes the NPRM in the Federal Register. After the notice-and-comment period concludes, the FTC will consider the comments and then publish a final version of the rule. Enforcement may begin 180 days after publication of the final rule (although, as discussed below, the final rule is likely to be challenged in court).

The final rule’s terms will depend in part on the FTC’s response to comments submitted by interested parties during this notice-and-comment period, including legal and practical objections raised to the rule. Thus, concerned parties are advised to submit robust comments thoroughly explaining their concerns, including potential costs and adverse effects.

Legal Challenges to the Rule Are Likely Once It Is Finalized

The proposed rule represents a significant expansion of the FTC’s regulatory reach in two respects: First, the Commission had not previously held non-compete agreements to be unfair methods of competition under the Federal Trade Commission Act, until its recently announced settlements. Second, substantial doubt exists that the FTC possesses rulemaking authority in this area.‎ As Gibson Dunn partners have explained and Commissioner Christine S. Wilson notes in her statement dissenting to the Notice of Proposed Rulemaking, any final rule is likely subject to several potentially significant legal challenges.  Commissioner Wilson notes three concerns:

  1. Congress did not intend to grant authority to promulgate substantive competition rules under the FTC Act provisions on which the FTC purports to rely to promulgate the proposed rule.‎
  2. The rule may exceed the limits imposed by the Supreme Court’s major questions‎ doctrine.
  3. The rule may exceed the limits imposed by the Supreme Court’s nondelegation doctrine.

Takeaways

This new proposed rule is part of a larger trend toward more vigorous federal regulation of the employment relationship, including by the FTC, National Labor Relations Board, and the U.S. Department of Labor (DOL), as we have noted in previous client alerts addressing the FTC’s approach to no-poach and nonsolicit agreements, the DOL’s rulemaking on who qualifies as an independent contractor under the Fair Labor Standards Act (FLSA), and the FTC’s broader vision of its authority to address unfair methods of competition under Section 5.

‎

[1] See also, the joint statement of Chair Lina Khan and Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya, and the dissenting statement of Commissioner Christine S. Wilson.

[2] Notably, prior FTC workshops on this subject focused on low-wage employees, but this proposed rule goes beyond that scope. 

In Antitrust & Competition, Federal Trade Commission, Section 5 , , , , ,
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FTC Biweekly UMC Roundup – Refugee from the FTC Edition

Daniel Gilman —  21 October 2022

Faithful and even occasional readers of this roundup might have noticed a certain temporal discontinuity between the last post and this one. The inimitable Gus Hurwitz has passed the scrivener’s pen to me, a recent refugee from the Federal Trade Commission (FTC), and the roundup is back in business. Any errors going forward are mine. Going back, blame Gus.

Commissioner Noah Phillips departed the FTC last Friday, leaving the Commission down a much-needed advocate for consumer welfare and the antitrust laws as they are, if not as some wish they were. I recommend the reflections posted by Commissioner Christine S. Wilson and my fellow former FTC Attorney Advisor Alex Okuliar. Phillips collaborated with his fellow commissioners on matters grounded in the law and evidence, but he wasn’t shy about crying frolic and detour when appropriate.

The FTC without Noah is a lesser place. Still, while it’s not always obvious, many able people remain at the Commission and some good solid work continues. For example, FTC staff filed comments urging New York State to reject a Certificate of Public Advantage (“COPA”) application submitted by SUNY Upstate Health System and Crouse Medical. The staff’s thorough comments reflect investigation of the proposed merger, recent research, and the FTC’s long experience with COPAs. In brief, the staff identified anticompetitive rent-seeking for what it is. Antitrust exemptions for health-care providers tend to make health care worse, but more expensive. Which is a corollary to the evergreen truth that antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.

More Good News from the Commission

On Sept. 30, a unanimous Commission announced that an independent physician association in New Mexico had settled allegations that it violated a 2005 consent order. The allegations? Roughly 400 physicians—independent competitors—had engaged in price fixing, violating both the 2005 order and the Sherman Act. As the concurring statement of Commissioners Phillips and Wilson put it, the new order “will prevent a group of doctors from allegedly getting together to negotiate… higher incomes for themselves and higher costs for their patients.” Oddly, some have chastised the FTC for bringing the action as anti-labor. But the IPA is a regional “must-have” for health plans and a dominant provider to consumers, including patients, who might face tighter budget constraints than the median physician

Peering over the rims of the rose-colored glasses, my gaze turns to Meta. In July, the FTC sued to block Meta’s proposed acquisition of Within Unlimited (and its virtual-reality exercise app, Supernatural). Gus wrote about it with wonder, noting reports that the staff had recommended against filing, only to be overruled by the chair.

Now comes October and an amended complaint. The amended complaint is even weaker than the opening salvo. Now, the FTC alleges that the acquisition would eliminate potential competition from Meta in a narrower market, VR-dedicated fitness apps, by “eliminating any probability that Meta would enter the market through alternative means absent the Proposed Acquisition, as well as eliminating the likely and actual beneficial influence on existing competition that results from Meta’s current position, poised on the edge of the market.”

So what if Meta were to abandon the deal—as the FTC wants—but not enter on its own? Same effect, but the FTC cannot seriously suggest that Meta has a positive duty to enter the market. Is there a jurisdiction (or a planet) where a decision to delay or abandon entry would be unlawful unilateral conduct? Suppose instead that Meta enters, with virtual-exercise guns blazing, much to the consternation of firms actually in the market, which might complain about it. Then what? Would the Commission cheer or would it allege harm to nascent competition, or perhaps a novel vertical theory? And by the way, how poised is Meta, given no competing product in late-stage development? Would the FTC prefer that Meta buy a different competitor? Should the overworked staff commence Meta’s due diligence?

Potential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established. But this is a nascent market in a large, highly dynamic, and innovative industry. The competitive landscape a few years down the road is anyone’s guess. More speculation: the staff was right all along. For more, see Dirk Auer’s or Geoffrey Manne’s threads on the amended complaint.

When It Rains It Pours Regulations

On Aug. 22, the FTC published an advance notice of proposed rulemaking (ANPR) to consider the potential regulation of “commercial surveillance and data security” under its Section 18 authority. Shortly thereafter, they announced an Oct. 20 open meeting with three more ANPRs on the agenda.

First, on the advance notice: I’m not sure what they mean by “commercial surveillance.” The term doesn’t appear in statutory law, or in prior FTC enforcement actions. It sounds sinister and, surely, it’s an intentional nod to Shoshana Zuboff’s anti-tech polemic “The Age of Surveillance Capitalism.” One thing is plain enough: the proffered definition is as dramatically sweeping as it is hopelessly vague. The Commission seems to be contemplating a general data regulation of some sort, but we don’t know what sort. They don’t say or even sketch a possible rule. That’s a problem for the FTC, because the law demands that the Commission state its regulatory objectives, along with regulatory alternatives under consideration, in the ANPR itself. If they get to an NPRM, they are required to describe a proposed rule with specificity.

What’s clear is that the ANPR takes a dim view of much of the digital economy. And while the Commission has considerable experience in certain sorts of privacy and data security matters, the ANPR hints at a project extending well past that experience. Commissioners Phillips and Wilson dissented for good and overlapping reasons. Here’s a bit from the Phillips dissent:

When adopting regulations, clarity is a virtue. But the only thing clear in the ANPR is a rather dystopic view of modern commerce….I cannot support an ANPR that is the first step in a plan to go beyond the Commission’s remit and outside its experience to issue rules that fundamentally alter the internet economy without a clear congressional mandate….It’s a naked power grab.

Be sure to read the bonus material in the Federal Register—supporting statements from Chair Lina Khan and Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, and dissenting statements from Commissioners Phillips and Wilson. Chair Khan breezily states that “the questions we ask in the ANPR and the rules we are empowered to issue may be consequential, but they do not implicate the ‘major questions doctrine.’” She’s probably half right: the questions do not violate the Constitution. But she’s probably half wrong too.

For more, see ICLE’s Oct. 20 panel discussion and the executive summary to our forthcoming comments to the Commission.

But wait, there’s more! There were three additional ANPRs on the Commission’s Oct. 20 agenda. So that’s four and counting. Will there be a proposed rule on non-competes? Gig workers? Stay tuned. For now, note that rules are not self-enforcing, and that the chair has testified to Congress that the Commission is strapped for resources and struggling to keep up with its statutory mission. Are more regulations an odd way to ask Congress for money? Thus far, there’s no proposed rule on gig workers, but there was a Policy Statement on Enforcement Related to Gig Workers.. For more on that story, see Alden Abbott’s TOTM post.

Laws, Like People, Have Their Limits

Read Phillips’s parting dissent in Passport Auto Group, where the Commission combined legitimate allegations with an unhealthy dose of overreach:

The language of the unfairness standard has given the FTC the flexibility to combat new threats to consumers that accompany the development of new industries and technologies. Still, there are limits to the Commission’s unfairness authority. Because this complaint includes an unfairness count that aims to transform Section 5 into an undefined discrimination statute, I respectfully dissent.”

Right. Three cheers for effective enforcement of the focused antidiscrimination laws enacted by Congress by the agencies actually charged to enforce those laws. And to equal protection. And three more, at least, for a little regulatory humility, if we find it.

In Administrative Law, Antitrust & Competition, Biweekly FTC Roundup, Data Privacy & Security, Exemptions, Facebook, Federal Trade Commission, Mergers & Acquisitions, Platforms, Regulation, Section 5, Truth on the Market , , , , , , , , , , , , , , , , , , , ,
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The FTC UMC Roundup–A Weekly Review

Gus Hurwitz —  20 May 2022

Welcome to the FTC UMC Roundup, our new weekly update of news and events relating to antitrust and, more specifically, to the Federal Trade Commission’s (FTC) newfound interest in “revitalizing” the field. Each week we will bring you a brief recap of the week that was and a preview of the week to come. All with a bit of commentary and news of interest to regular readers of Truth on the Market mixed in.

This week’s headline? Of course it’s that Alvaro Bedoya has been confirmed as the FTC’s fifth commissioner—notably breaking the commission’s 2-2 tie between Democrats and Republicans and giving FTC Chair Lina Khan the majority she has been lacking. Politico and Gibson Dunn both offer some thoughts on what to expect next—though none of the predictions are surprising: more aggressive merger review and litigation; UMC rulemakings on a range of topics, including labor, right-to-repair, and pharmaceuticals; and privacy-related consumer protection. The real question is how quickly and aggressively the FTC will implement this agenda. Will we see a flurry of rulemakings in the next week, or will they be rolled out over a period of months or years? Will the FTC risk major litigation questions with a “go big or go home” attitude, or will it take a more incrementalist approach to boiling the frog?

Much of the rest of this week’s action happened on the Hill. Khan, joined by Securities and Exchange Commission (SEC) Chair Gary Gensler, made the regular trip to Congress to ask for a bigger budget to support more hires. (FTC, Law360) Sen. Mike Lee  (R-Utah) asked for unanimous consent on his State Antitrust Enforcement Venue Act, but met resistance from Sen. Amy Klobuchar (D-Minn.), who wants that bill paired with her own American Innovation and Choice Online Act. This follows reports that Senate Majority Leader Chuck Schumer (D-N.Y.) is pushing Klobuchar to get support in line for both AICOA and the Open App Markets Act to be brought to the Senate floor. Of course, if they had the needed support, we probably wouldn’t be talking so much about whether they have the needed support.

Questions about the climate at the FTC continue following release of the Office of Personnel Management’s (OPM) Federal Employee Viewpoint Survey. Sen. Roger Wicker (R-Miss.) wants to know what has caused staff satisfaction at the agency to fall precipitously. And former senior FTC staffer Eileen Harrington issued a stern rebuke of the agency at this week’s open meeting, saying of the relationship between leadership and staff that: “The FTC is not a failed agency but it’s on the road to becoming one. This is a crisis.”

Perhaps the only thing experiencing greater inflation than the dollar is interest in the FTC doing something about inflation. Alden Abbott and Andrew Mercado remind us that these calls are misplaced. But that won’t stop politicians from demanding the FTC do something about high gas prices. Or beef production. Or utilities. Or baby formula.

A little further afield, the 5th U.S. Circuit Court of Appeals issued an opinion this week in a case involving SEC administrative-law judges that took broad issue with them on delegation, due process, and “take care” grounds. It may come as a surprise that this has led to much overwrought consternation that the opinion would dismantle the administrative state. But given that it is often the case that the SEC and FTC face similar constitutional issues (recall that Kokesh v. SEC was the precursor to AMG Capital), the 5th Circuit case could portend future problems for FTC adjudication. Add this to the queue with the Supreme Court’s pending review of whether federal district courts can consider constitutional challenges to an agency’s structure. The court was already scheduled to consider this question with respect to the FTC this next term in Axon, and agreed this week to hear a similar SEC-focused case next term as well. 

Some Navel-Gazing News! 

Congratulations to recent University of Michigan Law School graduate Kacyn Fujii, winner of our New Voices competition for contributions to our recent symposium on FTC UMC Rulemaking (hey, this post is actually part of that symposium, as well!). Kacyn’s contribution looked at the statutory basis for FTC UMC rulemaking authority and evaluated the use of such authority as a way to address problematic use of non-compete clauses.

And, one for the academics (and others who enjoy writing academic articles): you might be interested in this call for proposals for a research roundtable on Market Structuring Regulation that the International Center for Law & Economics will host in September. If you are interested in writing on topics that include conglomerate business models, market-structuring regulation, vertical integration, or other topics relating to the regulation and economics of contemporary markets, we hope to hear from you!

In Administrative Law, Antitrust & Competition, Biweekly FTC Roundup, Federal Trade Commission, Financial Regulation, Merger Guidelines, Regulation, Section 5, Truth on the Market , , , , , , , , , ,
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Chair Khan’s Latest Flawed Perspective on Mergers Ignores Empirics and Sound Economics

Alden Abbott —  16 May 2022

Federal Trade Commission (FTC) Chair Lina Khan missed the mark once again in her May 6 speech on merger policy, delivered at the annual meeting of the International Competition Network (ICN). At a time when the FTC and U.S. Justice Department (DOJ) are presumably evaluating responses to the agencies’ “request for information” on possible merger-guideline revisions (see here, for example), Khan’s recent remarks suggest a predetermination that merger policy must be “toughened” significantly to disincentivize a larger portion of mergers than under present guidance. A brief discussion of Khan’s substantively flawed remarks follows.

Discussion

Khan’s remarks begin with a favorable reference to the tendentious statement from President Joe Biden’s executive order on competition that “broad government inaction has allowed far too many markets to become uncompetitive, with consolidation and concentration now widespread across our economy, resulting in higher prices, lower wages, declining entrepreneurship, growing inequality, and a less vibrant democracy.” The claim that “government inaction” has enabled increased market concentration and reduced competition has been shown to be  inaccurate, and therefore cannot serve as a defensible justification for a substantive change in antitrust policy. Accordingly, Khan’s statement that the executive order “underscores a deep mandate for change and a commitment to creating the enabling environment for reform” rests on foundations of sand.

Khan then shifts her narrative to a consideration of merger policy, stating:

Merger investigations invite us to make a set of predictive assessments, and for decades we have relied on models that generally assumed markets are self-correcting and that erroneous enforcement is more costly than erroneous non-enforcement. Both the experience of the U.S. antitrust agencies and a growing set of empirical research is showing that these assumptions appear to have been at odds with market realities.

Digital Markets

Khan argues, without explanation, that “the guidelines must better account for certain features of digital markets—including zero-price dynamics, the competitive significance of data, and the network externalities that can swiftly lead markets to tip.” She fails to make any showing that consumer welfare has been harmed by mergers involving digital markets, or that the “zero-price” feature is somehow troublesome. Moreover, the reference to “data” as being particularly significant to antitrust analysis appears to ignore research (see here) indicating there is an insufficient basis for having an antitrust presumption involving big data, and that big data (like R&D) may be associated with innovation, which enhances competitive vibrancy.

Khan also fails to note that network externalities are beneficial; when users are added to a digital platform, the platform’s value to other users increases (see here, for example). What’s more (see here), “gateways and multihoming can dissipate any monopoly power enjoyed by large networks[,] … provid[ing] another reason” why network effects may not raise competitive problems. In addition, the implicit notion that “tipping” is a particular problem is belied by the ability of new competitors to “knock off” supposed entrenched digital monopolists (think, for example, of Yahoo being displaced by Google, and Myspace being displaced by Facebook). Finally, a bit of regulatory humility is in order. Given the huge amount of consumer surplus generated by digital platforms (see here, for example), enforcers should be particularly cautious about avoiding more aggressive merger (and antitrust in general) policies that could detract from, rather than enhance, welfare.

Labor Markets

Khan argues that guidelines drafters should “incorporate new learning” embodied in “empirical research [that] has shown that labor markets are highly concentrated” and a “U.S. Treasury [report] recently estimating that a lack of competition may be costing workers up to 20% of their wages.” Unfortunately for Khan’s argument, these claims have been convincingly debunked (see here) in a new study by former FTC economist Julie Carlson (see here). As Carlson carefully explains, labor markets are not highly concentrated and labor-market power is largely due to market frictions (such as occupational licensing), rather than concentration. In a similar vein, a recent article by Richard Epstein stresses that heightened antitrust enforcement in labor markets would involve “high administrative and compliance costs to deal with a largely nonexistent threat.” Epstein points out:

[T]raditional forms of antitrust analysis can perfectly deal with labor markets. … What is truly needed is a close examination of the other impediments to labor, including the full range of anticompetitive laws dealing with minimum wage, overtime, family leave, anti-discrimination, and the panoply of labor union protections, where the gains to deregulation should be both immediate and large.

Nonhorizontal Mergers

Khan notes:

[W]e are looking to sharpen our insights on non-horizontal mergers, including deals that might be described as ecosystem-driven, concentric, or conglomerate. While the U.S. antitrust agencies energetically grappled with some of these dynamics during the era of industrial-era conglomerates in the 1960s and 70s, we must update that thinking for the current economy. We must examine how a range of strategies and effects, including extension strategies and portfolio effects, may warrant enforcement action.

Khan’s statement on non-horizontal mergers once again is fatally flawed.

With regard to vertical mergers (not specifically mentioned by Khan), the FTC abruptly withdrew, without explanation, its approval of the carefully crafted 2020 vertical-merger guidelines. That action offends the rule of law, creating unwarranted and costly business-sector confusion. Khan’s lack of specific reference to vertical mergers does nothing to solve this problem.

With regard to other nonhorizontal mergers, there is no sound economic basis to oppose mergers involving unrelated products. Threatening to do so would have no procompetitive rationale and would threaten to reduce welfare by preventing the potential realization of efficiencies. In a 2020 OECD paper drafted principally by DOJ and FTC economists, the U.S. government meticulously assessed the case for challenging such mergers and rejected it on economic grounds. The OECD paper is noteworthy in its entirely negative assessment of 1960s and 1970s conglomerate cases which Khan implicitly praises in suggesting they merely should be “updated” to deal with the current economy (citations omitted):

Today, the United States is firmly committed to the core values that antitrust law protect competition, efficiency, and consumer welfare rather than individual competitors. During the ten-year period from 1965 to 1975, however, the Agencies challenged several mergers of unrelated products under theories that were antithetical to those values. The “entrenchment” doctrine, in particular, condemned mergers if they strengthened an already dominant firm through greater efficiencies, or gave the acquired firm access to a broader line of products or greater financial resources, thereby making life harder for smaller rivals. This approach is no longer viewed as valid under U.S. law or economic theory. …

These cases stimulated a critical examination, and ultimate rejection, of the theory by legal and economic scholars and the Agencies. In their Antitrust Law treatise, Phillip Areeda and Donald Turner showed that to condemn conglomerate mergers because they might enable the merged firm to capture cost savings and other efficiencies, thus giving it a competitive advantage over other firms, is contrary to sound antitrust policy, because cost savings are socially desirable. It is now recognized that efficiency and aggressive competition benefit consumers, even if rivals that fail to offer an equally “good deal” suffer loss of sales or market share. Mergers are one means by which firms can improve their ability to compete. It would be illogical, then, to prohibit mergers because they facilitate efficiency or innovation in production. Unless a merger creates or enhances market power or facilitates its exercise through the elimination of competition—in which case it is prohibited under Section 7—it will not harm, and more likely will benefit, consumers.

Given the well-reasoned rejection of conglomerate theories by leading antitrust scholars and modern jurisprudence, it would be highly wasteful for the FTC and DOJ to consider covering purely conglomerate (nonhorizontal and nonvertical) mergers in new guidelines. Absent new legislation, challenges of such mergers could be expected to fail in court. Regrettably, Khan appears oblivious to that reality.

Khan’s speech ends with a hat tip to internationalism and the ICN:

The U.S., of course, is far from alone in seeing the need for a course correction, and in certain regards our reforms may bring us in closer alignment with other jurisdictions. Given that we are here at ICN, it is worth considering how we, as an international community, can or should react to the shifting consensus.

Antitrust laws have been adopted worldwide, in large part at the urging of the United States (see here). They remain, however, national laws. One would hope that the United States, which in the past was the world leader in developing antitrust economics and enforcement policy, would continue to seek to retain this role, rather than merely emulate other jurisdictions to join an “international community” consensus. Regrettably, this does not appear to be the case. (Indeed, European Commissioner for Competition Margrethe Vestager made specific reference to a “coordinated approach” and convergence between U.S. and European antitrust norms in a widely heralded October 2021 speech at the annual Fordham Antitrust Conference in New York. And Vestager specifically touted European ex ante regulation as well as enforcement in a May 5 ICN speech that emphasized multinational antitrust convergence.)

Conclusion

Lina Khan’s recent ICN speech on merger policy sends all the wrong signals on merger guidelines revisions. It strongly hints that new guidelines will embody pre-conceived interventionist notions at odds with sound economics. By calling for a dramatically new direction in merger policy, it interjects uncertainty into merger planning. Due to its interventionist bent, Khan’s remarks, combined with prior statements by U.S. Assistant Attorney General Jonathan Kanter (see here) may further serve to deter potentially welfare-enhancing consolidations. Whether the federal courts will be willing to defer to a drastically different approach to mergers by the agencies (one at odds with several decades of a careful evolutionary approach, rooted in consumer welfare-oriented economics) is, of course, another story. Stay tuned.  

In Antitrust & Competition, European Union, Federal Trade Commission, International, Merger Guidelines, Mergers & Acquisitions, Truth on the Market , , , , , , , , ,
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Hunting for Labor-Market Monopsonies (and Giffen Goods)

Eric Fruits —  11 May 2022

If you wander into an undergraduate economics class on the right day at the right time, you might catch the lecturer talking about Giffen goods: the rare case where demand curves can slope upward. The Irish potato famine is often used as an example. As the story goes, potatoes were a huge part of the Irish diet and consumed a large part of Irish family budgets. A failure of the potato crop reduced the supply of potatoes and potato prices soared. Because families had to spend so much on potatoes, they couldn’t afford much else, so spending on potatoes increased despite rising prices.

It’s a great story of injustice with a nugget of economics: Demand curves can slope upward!

Follow the students around for a few days, and they’ll be looking for Giffen goods everywhere. Surely, packaged ramen and boxed macaroni and cheese are Giffen goods. So are white bread and rice. Maybe even low-end apartments.

While it’s a fun concept to consider, the potato famine story is likely apocryphal. In truth, it’s nearly impossible to find a Giffen good in the real world. My version of Greg Mankiw’s massive “Principles of Economics” textbook devotes five paragraphs to Giffen goods, but it’s not especially relevant, which is perhaps why it’s only five paragraphs.

Wander into another economics class, and you might catch the lecturer talking about monopsony—that is, a market in which a small number of buyers control the price of inputs such as labor. I say “might” because—like Giffen goods—monopsony is an interesting concept to consider, but very hard to find a clear example of in the real world. Mankiw’s textbook devotes only four paragraphs to monopsony, explaining that the book “does not present a formal model of monopsony because, in the world, monopsonies are rare.”

Even so, monopsony is a hot topic these days. It seems that monopsonies are everywhere. Walmart and Amazon are monopsonist employers. So are poultry, pork, and beef companies. Local hospitals monopsonize the market for nurses and physicians. The National Collegiate Athletic Association is a monopsony employer of college athletes. Ultimate Fighting Championship has a monopsony over mixed-martial-arts fighters.

In 1994, David Card and Alan Krueger’s earthshaking study found a minimum wage increase had no measurable effect on fast-food employment and retail prices. They investigated monopsony power as one explanation but concluded that a monopsony model was not supported by their findings. They note:

[W]e find that prices of fast-food meals increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers. Within New Jersey, however, we find no evidence that prices increased more in stores that were most affected by the minimum-wage rise. Taken as a whole, these findings are difficult to explain with the standard competitive model or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models). [Emphasis added]

Even so, the monopsony hunt was on and it intensified during President Barack Obama’s administration. During his term, the U.S. Justice Department (DOJ) brought suit against several major Silicon Valley employers for anticompetitively entering into agreements not to “poach” programmers and engineers from each other. The administration also brought suit against a hospital association for an agreement to set uniform billing rates for certain nurses. Both cases settled but the Silicon Valley allegations led to a private class-action lawsuit.

In 2016, Obama’s Council of Economic Advisers published an issue brief on labor-market monopsony. The brief concluded that “evidence suggest[s] that firms may have wage-setting power in a broad range of settings.”

Around the same time, the Obama administration announced that it intended to “criminally investigate naked no-poaching or wage-fixing agreements that are unrelated or unnecessary to a larger legitimate collaboration between the employers.” The DOJ argued that no-poach agreements that allocate employees between companies are per se unlawful restraints of trade that violate Section 1 of the Sherman Act.

If one believes that monopsony power is stifling workers’ wages and benefits, then this would be a good first step to build up a body of evidence and precedence. Go after the low-hanging fruit of a conspiracy that is a per se violation of the Sherman Act, secure some wins, and then start probing the more challenging cases.

After several matters that resulted in settlements, the DOJ brought its first criminal wage-fixing case in late 2020. In United States v. Jindal, the government charged two employees of a Texas health-care staffing company of colluding with another staffing company to decrease pay rates for physical therapists and physical-therapist assistants.

The defense in Jindal conceded that that price-fixing was per se illegal under the Sherman Act but argued that prices and wages are two different concepts. Therefore, the defense claimed that, even if it was engaged in wage-fixing, the conduct would not be per se illegal. That was a stretch, and the district court judge was having none of that in ruling that: “The antitrust laws fully apply to the labor markets, and price-fixing agreements among buyers … are prohibited by the Sherman Act.”

Nevertheless, the jury in Jindal found the defendants not guilty of wage-fixing in violation of the Sherman Act, and also not guilty of a related conspiracy charge.

The DOJ also brought criminal no-poach cases against three other health-care companies and their employees: United States v. Surgical Care Affiliates LLC; United States v. Hee; and United States v. DaVita Inc. Each of the indictments alleged no-poach agreements in which defendants conspired with competitors not to recruit each other’s employees. Hee also included wage-fixing allegations.

Before trial, the defense in DaVita filed a motion to dismiss, arguing that no-poach agreements did not amount to illegal market-allocation agreements. Instead, the defense claimed that no-poach agreements were something less restrictive. Rather than a flat-out refusal to hire competitors’ employees, they were more akin to agreeing not to seek out competitors’ employees. As with Jindal, this was too much of a stretch for the judge who ruled that no-poach agreements could be an illegal market-allocation agreement.

A day after the Jindal verdict, the jury in DaVita acquitted the kidney-dialysis provider and its former CEO of charges that they conspired with competitors to suppress competition for employees through no-poach agreements.

The DaVita jurors appeared to be hung up on the definition of “meaningful competition” in the relevant market. The defense presented information showing that, despite any agreements, employees frequently changed jobs among the companies. Thus, it was argued that any agreement did not amount to an allocation of the market for employees.

The prosecution called several corporate executives who testified that the non-solicitation agreements merely required DaVita employees to tell their bosses they were looking for another job before they could be considered for positions at the three alleged co-conspirator companies. Some witnesses indicated that, by informing their bosses, they were able to obtain promotions and/or increased compensation. This was supported by expert testimony concluding that DaVita salaries changed during the alleged conspiracy period at a rate higher than the health-care industry as a whole. This finding is at-odds with a theory that the non-solicitation agreement was designed to stabilize or suppress compensation.

The Jindal and DaVita cases highlight some of the enormous challenges in mounting a labor-monopsonization case. Even if agencies can “win” or get concessions on defining the relevant markets, they still face challenges in establishing that no-poach agreements amount to a “meaningful” restraint of trade. DaVita suggests that a showing of job turnover and/or increased compensation during an alleged conspiracy period may be sufficient to convince a jury that a no-poach agreement may not be anticompetitive and—under certain circumstances—may even be pro-competitive.

For now, the hunt for a monopsony labor market continues its quest, along with the hunt for the ever-elusive Giffen good.

In Antitrust & Competition, Antitrust Division, Cartels, Health Care, Justice Department, Platforms, Price Discrimination, Truth on the Market , , , , , , , ,
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Labor Antitrust Analysis Should Focus on Actual Anticompetitive Agreements

Alden Abbott —  5 May 2022

Biden administration enforcers at the U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) have prioritized labor-market monopsony issues for antitrust scrutiny (see, for example, here and here). This heightened interest comes in light of claims that labor markets are highly concentrated and are rife with largely neglected competitive problems that depress workers’ income. Such concerns are reflected in a March 2022 U.S. Treasury Department report on “The State of Labor Market Competition.”

Monopsony is the “flip side” of monopoly and U.S. antitrust law clearly condemns agreements designed to undermine the “buyer side” competitive process (see, for example, this U.S. government submission to the OECD). But is a special new emphasis on labor markets warranted, given that antitrust enforcers ideally should seek to allocate their scarce resources to the most pressing (highest valued) areas of competitive concern?

A May 2022 Information Technology & Innovation (ITIF) study from ITIF Associate Director (and former FTC economist) Julie Carlson indicates that the degree of emphasis the administration’s antitrust enforcers are placing on labor issues may be misplaced. In particular, the ITIF study debunks the Treasury report’s findings of high levels of labor-market concentration and the claim that workers face a “decrease in wages [due to labor market power] at roughly 20 percent relative to the level in a fully competitive market.” Furthermore, while noting the importance of DOJ antitrust prosecutions of hard-core anticompetitive agreements among employers (wage-fixing and no-poach agreements), the ITIF report emphasizes policy reforms unrelated to antitrust as key to improving workers’ lot.

Key takeaways from the ITIF report include:

  • Labor markets are not highly concentrated. Local labor-market concentration has been declining for decades, with the most concentrated markets seeing the largest declines.
  • Labor-market power is largely due to labor-market frictions, such as worker preferences, search costs, bargaining, and occupational licensing, rather than concentration.
  • As a case study, changes in concentration in the labor market for nurses have little to no effect on wages, whereas nurses’ preferences over job location are estimated to lead to wage markdowns of 50%.
  • Firms are not profiting at the expense of workers. The decline in the labor share of national income is primarily due to rising home values, not increased labor-market concentration.
  • Policy reform should focus on reducing labor-market frictions and strengthening workers’ ability to collectively bargain. Policies targeting concentration are misguided and will be ineffective at improving outcomes for workers.

The ITIF report also throws cold water on the notion of emphasizing labor-market issues in merger reviews, which was teed up in the January 2022 joint DOJ/FTC request for information (RFI) on merger enforcement. The ITIF report explains:

Introducing the evaluation of labor market effects unnecessarily complicates merger review and needlessly ties up agency resources at a time when the agencies are facing severe resource constraints.48 As discussed previously, labor markets are not highly concentrated, nor is labor market concentration a key factor driving down wages.

A proposed merger that is reportable to the agencies under the Hart-Scott-Rodino Act and likely to have an anticompetitive effect in a relevant labor market is also likely to have an anticompetitive effect in a relevant product market. … Evaluating mergers for labor market effects is unnecessary and costly for both firms and the agencies. The current merger guidelines adequately address competition concerns in input markets, so any contemplated revision to the guidelines should not incorporate a “framework to analyze mergers that may lessen competition in labor markets.” [Citation to Request for Information on Merger Enforcement omitted.]

In sum, the administration’s recent pronouncements about highly anticompetitive labor markets that have resulted in severely underpaid workers—used as the basis to justify heightened antitrust emphasis on labor issues—appear to be based on false premises. As such, they are a species of government misinformation, which, if acted upon, threatens to misallocate scarce enforcement resources and thereby undermine efficient government antitrust enforcement. What’s more, an unnecessary overemphasis on labor-market antitrust questions could impose unwarranted investigative costs on companies and chill potentially efficient business transactions. (Think of a proposed merger that would reduce production costs and benefit consumers but result in a workforce reduction by the merged firm.)

Perhaps the administration will take heed of the ITIF report and rethink its plans to ramp up labor-market antitrust-enforcement initiatives. Promoting pro-market regulatory reforms that benefit both labor and consumers (for instance, excessive occupational-licensing restrictions) would be a welfare-superior and cheaper alternative to misbegotten antitrust actions.

In Antitrust & Competition, Antitrust Division, Barriers to Entry, Exclusionary Conduct, Exclusive Dealing, Federal Trade Commission, Justice Department, Monopolization, Truth on the Market, Vertical Restraints , , , , , , , , ,
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NEW VOICES: FTC Rulemaking for Noncompetes

Kacyn H. Fujii —  3 May 2022

[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.

In Administrative Law, Antitrust & Competition, Exclusionary Conduct, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Symposia, Truth on the Market , , , , , , , ,
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