Deep Dive Episode 254 – The Implications of the FTC’s Proposed Ban on Noncompete Agreements
In January 2023, the FTC announced a proposed rule that would ban noncompete agreements across most of the U.S. economy – a move President Biden lauded in his recent State of the Union address. While noncompete clauses have existed for centuries and have traditionally been regulated under state law, they have also become a focal point for the executive and legislative branches of late. The FTC’s proposed rule represents a recent effort to shift enforcement, both substantively and procedurally. The proposed rule purports to rely on the Commission’s “unfair methods of competition” (UMC) authority under Section 5 of the FTC Act. This is the first time in decades the FTC has sought to engage in a UMC rulemaking, and only the second time it has ever done so.
Questions are already beginning to arise as to not only the substantive benefits of such a ban, but also the FTC’s underlying authority to enact this rule. As a threshold matter, the FTC’s ability to engage in UMC rulemaking is somewhat unclear – the statutory basis for this authority is hotly disputed and very likely to be challenged. The FTC’s assertion that the rule would supersede contradictory state laws is also likely to draw challenges. Moreover, many have raised concerns that the proposed rule – which the FTC argues would immediately impact about 20% of the U.S. workforce – runs afoul of the major questions and nondelegation doctrines. Additionally, there are questions regarding how such a rule would ultimately impact employees, employers, and the workforce more broadly – in particular, whether such a ban is more likely to enhance or impair innovation. Our experts discuss the genesis of the FTC’s proposed ban on noncompete agreements, including the statutory and empirical evidence underpinning the rule, as well as what we can expect in the coming months and years as the FTC moves towards adopting and enforcing the rule.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
Steven Schaefer: Welcome to today’s webinar, “The Implications of the FTC’s Proposed Ban on Noncompete Agreements.”
My name is Steven Schaefer, and I am the Director of The Federalist Society’s Regulatory Transparency Project.
We are pleased to have with us a stellar panel of experts to share their insights today. Please note, The Federalist Society takes no position on particular legal or public policy matters. All expressions of opinion are those of the speakers.
I would like to introduce Svetlana S. Gans. In the interest of time, I will keep her introduction brief. Svetlana is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, LLP, where she helps clients navigate complex consumer protection, privacy, and competition-related regulatory proceedings before the FTC, the U.S. Department of Justice Antitrust Division, State Attorneys General, and other enforcement bodies.
Svetlana, over to you.
Svetlana Gans: Great. Thank you so much, Steve, and thank you for The Federalist Society hosting this program today. As Steve had mentioned, my name is Svetlana. I am also the co-chair of The Federalist Society Corporations, Securities & Antitrust Practice Group. On behalf of our Practice Group, the Labor Practice Group, and the Regulatory Transparency Project, I’d like to welcome you all here to discuss this important topic.
As our flier indicated, on January 2023, the FTC announced a proposed rule that would ban noncompete agreements across most of the U.S. economy, a move that President Biden lauded in his recent State of the Union address. This rulemaking would serve as the FTC’s first competition rulemaking in over five decades. In announcing the rule, the FTC stated that noncompetes were a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. The FTC said that by stopping this practice, the agency estimated that the new proposed rule would increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
The FTC is currently taking public comments on the proposed rule, which is based on a preliminary finding that noncompete agreements constitute an unfair method of competition, and therefore a violation of the Section 5 of the FTC Act. Over 15,000 comments have already been filed with the agency. The deadline for public comments is March 20th.
There are several things that we will be discussing on a panel that Elyse will moderate in a moment. As mentioned, there are several theories and very important questions presented in terms of the FTC rulemaking including the statutory authority, constitutionality, and empirical evidence. Our panels will discuss all these issues.
But first, we are thrilled to welcome our keynote speaker for this event, Rahul Rao, who is the Deputy Director of the Bureau of Competition at the FTC. He leads an office leadership team that oversees over 300 attorneys at the Federal Trade Commission and staff members focusing on competition enforcement and policy issues. Prior to joining the FTC, Rahul spent significant time at the Washington state Attorney General’s Office where he led a team and also litigated cases involving no-poach and noncompetition covenants, so he is well-versed in this area that we’ll be talking about today. He received his degrees from George Washington Law School among other institutions.
So with that, please join me in welcoming Rahul Rao for introductory remarks for today’s panel. Before he begins, we will take a Q&A session after his remarks, so if anyone has questions, please put them in the Q&A bar in the Zoom screen.
So with that, Rahul, welcome, and I’ll turn the panel over to you.
Rahul Rao: Thank you, Svetlana, for the introduction. And thank you to the Regulatory Transparency Project and The Federalist Society for inviting me to speak to you. I’m excited to be here today virtually, at least, to discuss the FTC’s ongoing work on noncompete restrictions. I’m also really excited to talk to this audience, in particular.
As we move forward with our rulemaking efforts, it’s important that we court and engage with the diversity of viewpoints and perspectives. Our goal here is to design a rule that does its best to ensure healthy, robust, and ultimately fair competition in labor markets for all American workers. We can only do that by going beyond the walls of our own institution. So I’m thrilled to talk to you today. I’m excited for the panel that will follow, and I’m hopeful that many of you will submit comments that will help us craft the final rule.
Before I go any further, I do want to note that my comments here today are my own and do not necessarily represent the views of the Commission or of any particular commissioner.
I’m going to touch upon four main topics today. First, I will talk about the problems posed by noncompete restrictions. Next, I will turn to how addressing these problems falls squarely under the FTC’s Section 5 authority. Authority which we elaborated on last year in an Agency policy statement. After that, I’ll briefly walk through some recent noncompete-related enforcement actions. And finally, I’ll discuss the Agency’s proposed rulemaking banning noncompetes.
As we jump into this discussion, a good place to start is with the foundational belief that a thriving, dynamic economy depends on fair competition for all markets and for all market participants. This means fair competition for consumers and also fair competition for workers. We in the anti-trust community should be skeptical of any methods that are designed to prevent this fair competition. And when it comes to noncompetes, it’s not hard to be skeptical. It’s in the name itself. No one is hiding the ball here. Noncompetes are exactly what they say they are. They are restrictions that block people from working for a competing employer or starting a competing business after their employment ends.
As competition lawyers, the name alone should give us some pause. No other restraint is so explicitly defined by what the antitrust laws were designed to protect. A noncompete eliminates all competition between employers for their covered workers’ services. It’s right there in the name. In terms of their prevalence and impact, we know today in no small part thanks to the research of Evan Starr—whom you’ll hear from later today as well as others—that noncompetes are far more widespread and harmful than one might have realized. These restrictions aren’t limited to a small class of C-suite-level employees. Rather, noncompetes are pervasive across all jobs and income levels from minimum wage workers to nurses to engineers, and yes, to senior executives.
Estimates vary, and some are much higher, but it would appear that noncompetes bind about one in five American workers. That is approximately 30 million people. One survey found that 35 percent of workers without a bachelor’s degree and 33 percent of workers earning less than $40,000 per year have worked under a noncompete clause at some point in their lives. Another analysis of the same data found that 53 percent of workers covered by noncompete clauses are hourly workers. In terms of labor market effects, noncompetes block the optimal matching between employers and workers. This can have a profound effect on both wages and working conditions. Serving the literature, FTC economists conservatively estimate that noncompetes suppress American workers’ income by roughly three to four percent, or $250 to $296 billion.
But noncompetes don’t harm just workers, they also harm innovation and new business formation. Concentration in consumer prices and products and services markets also suffer. In terms of prices, researchers have found a strong correlation between noncompetes and doctors’ employment contracts and higher patient costs. Relying on this research, we estimate that the proposal would reduce the amount Americans spend on healthcare by about $148 billion annually. And more broadly, when employees can change jobs freely, employers have access to larger talent pools. Better worker-firm matching increases wages and productivity simultaneously leading to lower consumer prices.
So now that we understand the prevalence and harm of noncompetes, what can we, the FTC, do about it? As it turns out, under our Section 5 authority, we can do a lot. I’m going to take a step back right now to discuss Section 5 generally before turning to some recent enforcement actions and the ongoing rulemaking effort.
Let’s start at the beginning. The FTC’s enabling legislation assigned it a unique role in advancing competition policy. Section 5 of the FTC Act gives us the power to prevent “unfair methods of competition.” And Section 6(g) authorizes the Commission to make rules and regulations to carry out the provisions of the FTC Act. In the first quarter-century, after it passed Sherman Act, Congress had grown increasingly dissatisfied with how generalist courts were applying the antitrust laws. In response, the Congress created a new independent and expert agency, the Federal Trade Commission, whose mandate was to police unfair methods of competition on top of enforcing the existing antitrust laws and the newly-minted Clayton Act. According to the Supreme Court, it was the FTC that would provide the best check on unfair competition. And in fact, the Supreme Court has time and again affirmed the Commission’s unique Section 5 authority. It has explicitly recognized that the Commission’s mandate is to define unfair methods of competition and that those determinations deserve great weight, that the Commission enjoys flexibility when defining unfair methods of competition, and that this flexibility includes not having to narrowly catalog precise practices, and that conduct condemned as unfair method of competition need not violate the other antitrust laws.
Unfortunately, with limited exceptions, such as with invitations to collude, the Commission has, over time, adopted an unduly cramped vision of Section 5. A misguided and self-imposed limited view of Section 5 that ultimately culminated in it being treated no different than the Sherman Act in its rule of reason. Late last year, the Commission corrected this shortcoming with a new Section 5 policy statement. This statement is firmly rooted in the cases defining the scope of the Agency’s authority. It fully reflects the Agency’s important and distinctive history while also reflecting upon its application for modern times where I believe there is now a broad consensus that competition problems continue to evade antitrust enforcement rooted in the rule of reason.
When evaluating potential Section 5 violations, the policy statement asks two questions. First, is the conduct a method of competition, and if so, is it unfair? A method of competition is conduct an actor undertakes in the marketplace that relates directly or indirectly to competition. It does not include natural marketplace conditions that are not of the respondent’s making. The conduct must also be unfair. One of the things the statement clearly draws out, both in the legislative history and in the cases is that “unfair” is a term in the statutory text that we have to take seriously in determining what conduct does or does not violate the statute. Based on past cases and Commission experience, unfair methods of competition usually involve conduct that is facially unfair, particularly where that conduct is coercive, deceptive, predatory, or in general, an abuse of one’s economic power. And yes, that is a lot of adjectives, but that’s because we need to respond in kind to the staggeringly diverse conduct that we encounter. Of course, more is needed to be unfair under Section 5. The conduct can’t just be abusive or coercive. It must also tend to negatively affect competitive conditions. That said, Section 5 does not demand a full-scale economic analysis of competitive effect.
These two aspects of unfair methods of competition are analyzed on a sliding scale. If the abuse or coercion is clear, less is needed to show a tendency to negatively affect competitive conditions, but when conduct is not as facially abusive or coercive, we may need to look more closely at the commercial settings to determine whether there is a tendency to negatively affect competitive conditions.
The most immediate consequence of this renewed attention to Section 5 is apparent in our recent consent agreements in public rulemaking, all of which concern noncompete agreements. Starting with the enforcement actions earlier this year, the Commission entered into a series of consent agreements with three companies and two individuals over the use of noncompetes. In the first of these enforcement actions, the Commission accepted a settlement with Prudential Security and its two owners over its employment contracts with security guards. Prudential required these guards—employees who are earning at or slightly above minimum wage and who received only minimal training—Prudential required them to sign noncompetes as a condition of employment. These restrictions prevented these low-wage security guards from working for a competitor or creating a competing business within a 100-mile radius for two years after departing Prudential. And if these employees violated the noncompete—a clause over which very few, if any, of these low-wage security guards had consulted with an attorney when hired—they had to pay $100,000 in liquidated damages. Nor did the employees receive any monetary compensation or job security in exchange for the noncompete restrictions.
Importantly, even after a Michigan state court ruled that Prudential’s noncompetes were unreasonable and unenforceable under state common law, Prudential continued to include these onerous terms in its employment contracts with other workers creating an undeniable chilling effect in those workers who would otherwise look for jobs to better their income, benefits, or job conditions.
On top of Prudential, the Commission also issued two separate complaints involving noncompete restrictions imposed by two of the largest manufacturers of glass, food, and beverage containers. These cases are notably different than Prudential. First, unlike Prudential, the workers at issue here were not necessarily low-wage workers. Glass manufacturing requires highly skilled workers who are compensated for that specialized skill. The second way these matters are different than the security guard case is that the glass container industry in the United States is highly concentrated with substantial barriers to entry and expansion. Among those barriers is the need for personnel with skill and experience in glass container manufacturing. These noncompete restrictions prohibited employees across a wide variety of positions including engineering and quality assurance from working for a competing business within the United States for one or two years after they left either company.
Importantly, in a highly concentrated market like the glass container industry, noncompete use like this makes unavailable the pool of skilled talent that new entrants need and thus, impedes the entry of new competition. In total, the Commission alleged that these noncompete restrictions used by these firms had the tendency or likely effect of harming competition, consumers, and workers by impeding entry and expansion of rivals in the glass container industry, reducing employee mobility, and causing lower pay, reduced benefits, less favorable working conditions, and personal hardship to employees.
The Commission also considered whether the companies had any legitimate objectives that the noncompetes were seeking to protect such as protecting trade secrets or other confidential information and found that if these interests were meaningfully present at all—a questionable assumption as to many of these employees—those interests could have been protected through significantly less restrictive means such as confidentiality agreements. In fact, both glass manufacturers nullified the challenge noncompete restrictions after learning of the Commission’s investigation apparently without incurring any notable impediment to their ability to achieve any legitimate business objective.
The noncompete practices underlying these enforcement actions and the harm they cause to markets represents just the tip of the iceberg. Remember, we are talking about one in five or about 30 million American workers who are bound by noncompetes. And while the Commission has primarily in the past pursued antitrust enforcement through adjudication, it turns now to its rulemaking powers to address this ill. The Commission’s reliance on rulemaking here reflects several important benefits including greater legal clarity and predictability, greater administrative ability and efficiency of enforcement, and greater public participation in airing of maximally broad ranges of viewpoints and criticisms. Some may find that a rule that applies to all firms and rivals at the same time, in the same way, is also more fair than piecemeal adjudication. These advantages are huge given the number of firms involved in this conduct.
Turning to the proposed rule itself, the FTC proposes a full ban on noncompetes because the harm they create is felt across all income levels and job descriptions. And even when employers have some legitimate interest to protect, protecting that interest by blanketly restricting worker mobility is overbroad and highly burdensome. Importantly, when it comes to protecting legitimate interest, employers have at their disposal less burdensome and more narrowly tailored options such as NDAs or non-solicitation agreements. And also, while some have pointed to training and other investments as a benefit of noncompetes, that benefit must be weighed against the harm of denying workers higher wages and better job conditions. In the Commission’s preliminary view, the asserted benefits from noncompete clauses do not outweigh these harms. In short, while there is considerable evidence noncompete clauses harm both workers and consumers, the evidence that noncompete clauses benefit workers or consumers is quite scant.
Another important feature of the proposed rule, as well as the policy statement, is the fact that the FTC’s unfair methods of competition authority can reach conduct that negatively affects competitive conditions in the aggregate. It’s well-established that our Section 5 authority reaches beyond the Sherman and Clayton Acts to touch violations of those laws’ spirit as well as to fill in those laws’ gaps. One of the limitations of the ways in which the law has treated noncompetes until now is the individual case-by-case nature of the inquiry. By contrast, the economic literature of the last 20 years has examined the economy-wide effects of noncompetes. The Agency’s rulemaking authority, coupled with case law making clear that Section 5 reaches aggregate conduct, makes this both an opportune moment and an opportune tool to address this widespread conduct and pervasive harm.
And as to why a nationwide ban is appropriate, here we have the benefit of seeing the diverse way states have throughout the years treated noncompetes. The diverse approach that has created a natural experiment that has allowed us and other researchers to understand the economy-wide effects of noncompetes. The results of those experiments have made it clear that a nationwide ban is necessary. As mentioned before, the harm of noncompetes is significant. Our proposed rulemaking includes a preliminary finding that workers are missing out on hundreds of billions of dollars plus the harms to innovation, to business formation, and to consumer pocketbooks. And it’s a problem that crosses state lines. Labor markets cross state lines. And one state’s choices spill over into other states. And even in states where noncompetes have been banned, employers use choice of law provisions to forum shop and subject employees to the laws of another state.
Another reason for a clear, nationwide rule is that this is an area where diverse approaches creates mass confusion. We cite evidence that noncompetes appear in contracts in states where those restrictions are unenforceable just as often as they do in states where they are permitted. Employers know that most workers don’t know whether a noncompete can be enforced or that those employees don’t want to risk being sued even if they suspect a restriction is unenforceable. And so, even in states where noncompetes are already banned, employers include these unenforceable restrictions because they benefit from a chilling effect that is just as severe as if the noncompetes could be enforced. A clear nationwide rule would eliminate an ambiguity and help ensure that workers know they have the freedom to switch jobs.
Finally, I just want to turn to where we are in the process. Right now, the proposed rule is just that. It’s a proposal. The Agency welcomes comments on whether and how the proposed rule can be strengthened or tailored. In particular, the notice of proposed rulemaking identifies several potential alternatives including a ban that would cover only a subset of workers or a rule that would apply different legal standards to different categories of workers. For example, we’ve asked questions about whether to have different rules for senior executives or for high-wage earners. We’ve also asked questions about franchisees given their unique relationship to franchisors and whether the rule ought to cover them in some way.
The rule-making process depends on the thoughtful contributions from members of the public and from all stakeholders. The Agency relies on its own economic and legal expertise, but that expertise is heavily informed by your feedback. The common period closes on March 20th, and I encourage all of you to share with us your thoughts by then.
Thank you for having me come today to speak about the FTC’s efforts and noncompetes. I’m happy to answer any questions I can before you move to what I imagine will be a great panel discussion. Thank you.
Svetlana Gans: Great. Thank you so much, Rahul, for your remarks. We do have a few audience questions before we turn to the panel.
So one audience member asks, “Some employee movement can be enjoined through the inevitable disclosure doctrine of trade secret law under state UTSAs and the federal DTSA. How does this fit into the FTC’s prohibition on de facto noncompetes? Could employers give advance notice to the set of employees subject to the inevitable disclosure injunctions under the proposed rule?
Rahul Rao: That’s a good question. So I mean, I think the interplay—I wanted to make sure I wasn’t on mute accidentally—the interplay of what the proposed rulemaking purports to do and how it intersects with other restrictions and laws is — I mean, that’s an important question and one that I hope that we can address more fully through the comments.
I don’t have a solid answer to the question itself. The proposed rule does prohibit de facto noncompetes. It does prohibit provisions that are not explicitly noncompetes that serve the same purpose. Now, whether that the inevitable disclosure doctrine is something that would intersect with that, I mean, I think that’s a conversation that is worth having. And like I said, this is a proposed rule, and I encourage feedback on this to the Commission.
Svetlana Gans: Okay. Great. We have one more question, and hopefully—I’m not sure if you can answer this, but the question is “The Commission, itself, has reported that the proposal will only increase wages by 2.3 percent for hourly workers while delivering a 9.4 percent increase for CEOs. Additionally, many commenters have voiced concern that a ban on noncompetes will eliminate the incentive to provide on-the-job training front. Considering this, wouldn’t Congress be better equipped to address such narrow questions of cost-benefit analysis?
Rahul Rao: That’s a good question, and there’s different ways to approach this. So, one, with respect to disparity and increases between low-wage workers and CEOs, I mean, let’s take as a given that those estimates are accurate. The fact that CEOs are to benefit is not a reason to deny a benefit to low-wage workers even if it is not a one-for-one match in a percentage increase.
In terms of the issue of on-job training, this is one where I think commentary would be really useful because from my perspective—and I think, from a lot of people’s perspectives—employers need to provide training to their employees. That’s just a function of running a business. If you live in a small town where you have two auto mechanics, and these are basic auto mechanics. They do oil changes, rotate tires, and things like that. And you have no noncompetes in this town. One of those two mechanics could take the position that “Okay. I’m not going to invest in my employees because they can just take that training and leave.” While the other mechanic will take the position that “No. I’m going to train my people how to properly do oil changes and rotate tires because consumers are going to want to go to the mechanic that knows how to do the job.”
So the idea that somehow noncompetes are the thing that makes training possible I don’t think is supported by the economic literature. I mean, I think at the most, what the noncompetes do is it allows the employer to retain and monetize the value of that training while depriving the employee the right to capitalize off of it by bettering their working conditions or seeking promotion elsewhere.
And as to the final point is like, “Wouldn’t Congress be better equipped to address such narrow questions?” I mean, that’s a good question. I mean, Congress has the authority to regulate this, but I think the FTC has the authority to regulate this as well under our rulemaking authority. We would welcome Congress to pass legislation on this, but again, the fact — whether Congress can or should do it doesn’t mean that the FTC doesn’t have the authority, and the FTC shouldn’t do it in the absence of congressional action.
Svetlana Gans: So we have two more questions. Hopefully, we have time for both.
One commenter asks, “If public feedback is so important to the Commission’s decision-making process, why is the Commission only allowing 60 days for a public comment? This is complicated stuff, and the business community has requested an extension to submit thoughtful comments.”
Rahul Rao: Well, the comment period is currently set to expire on the 20th. I mean, I think a 60-day comment period is quite a comprehensive—it’s quite a long amount of time. This is a conversation that has been happening well before the notice of proposed rulemaking was issued. It’s not up to me to set the deadlines on the rulemaking, but I think we think at the moment that 60 days is sufficient. I mean, obviously, I understand and hear the reasons for wanting more time, but 60 days is quite a bit of time too.
Svetlana Gans: Okay. We have time for one last question. And thank you so much for your time, Rahul.
Rahul Rao: Yeah.
Svetlana Gans: Greatly appreciate it. One question asks, “I’m an inventor and a small business owner. Why would I hire people that could take the experience and information gained from my business and use it at a larger company to destroy my business?”
Rahul Rao: Well, once again, there are tools that continue to be at one’s disposal to prevent the misappropriation of trade secrets or confidential information. It’s not that anyone has a right to steal information and take it to a competitor. The question is whether a blanket restriction on that person’s mobility is an appropriately tailored tool to protect that interest. So I agree that no one should be misappropriating your information and your proprietary trade secrets, but I also don’t think that prohibiting somebody from taking a different job is sufficiently tailored to serve that purpose to protect that interest.
Svetlana Gans: Okay. Well, that is all the time we have for questions. Thank you, audience, for your engagement. Thank you, Rahul, for your time and informative remarks. We appreciate it.
So with that, I will turn it over to Elyse to get us started on the panel discussion. Thanks, everyone.
Elyse Dorsey: Yes. Thank you so much, Svetlana and Rahul, for that fantastic introduction to the FTC’s proposed rule on noncompete agreements. I think, as you can see, this rulemaking represents a big step and a big change for the FTC and potentially for the economy as well. And although the rule is still in the initial comment period, as Rahul mentioned, it’s already garnering significant discussion, and I’m really excited to have an excellent group of panelists here today.
I’ll just give a brief introduction that won’t do our panelists justice so that we reserve as much time as possible for discussion, but you can check out their full bios from the link on our event webpage. And I will also be monitoring the Q&A function, so please do submit any more questions that you might want our panelists to address.
All right, turning now to our panelists, Corbin Barthold is the Internet Policy Counsel and Director of Appellate Litigation at TechFreedom. Diana Furchtgott-Roth is the Director at the Center for Energy, Climate, and Environment and the Herbert and Joyce Morgan Fellow in Energy and Environmental Policy at The Heritage Foundation. Gus Hurwitz is the Professor of Law and the Menard Director of the Nebraska Governance and Technology Center at the University of Nebraska’s College of Law. Matthew Sipe is Assistant Professor of Law at the University of Baltimore. And Evan Starr is Associate Professor at the Robert H. Smith School of Business at the University of Maryland.
So we thought we’d start our discussion today with the question of the FTC’s authority as an administrative agency to create rules defining unfair methods of competition. While some have argued that the FTC has clear authority to engage in this rulemaking—and Rahul previewed some of those arguments for us—others argue that this is very much in question, and the FTC might not have this authority at all. The FTC has only ever attempted one other UMC rulemaking, and unlike on its consumer protection side where it has enacted several rules to define unfair deceptive acts or practices.
So, Gus, what’s the alleged statutory basis for the FTC’s UMC rulemaking authority here?
Gus Hurwitz: So, Elyse, thank you for having me. Thank you to our DP at FedSoc and also thank you to Rahul for his comments and for queueing up this question. Towards the end of his comments he stated that the Commission—in response to whether the Congress should do this—he welcomed the idea that Congress could do this but also said the Commission has rulemaking authority here, so let’s do it. And that is one of the many really substantial questions, whether the Commission actually does have rulemaking authority. So I’m going to try to not fall into professor mode, which would mean lecturing for 45 minutes about this rulemaking question.
In a nutshell, the Federal Trade Commission has two discreet groups of authorities: it’s unfair and deceptive acts and practices, or consumer protection authority, and its UMC, or unfair methods of competition or antitrust authority. The Commission has very clear rulemaking authority for consumer protection rules. There’s a set of procedures put in place in the 1970s specifically governing how to do that rulemaking.
The Commission’s authority to adopt antitrust rules is much more tenuous we could say. They’ve only tried to adopt these rules once, and this led to a big case in the 1970s, which did hold that they have rulemaking authority here. So this goes to Section 6(g) of the Federal Trade Commission Act, which empowers the Commission to make rules and regulations for the purpose of carrying out the provisions of this subchapter. And ordinarily, we look at that role — that power and say, “Okay. This gives you the ability to create procedural roles, administrative roles, rules of practice, things that govern how, as an agency, you are going to act.” But in the 1970s, the D.C. Circuit reviewing the octane rule that the Commission had adopted in a case called National Petroleum Refiners found that Section 6(g) does give the Commission authority to adopt substantive unfair methods of competition rules. This has never been litigated outside of the D.C. Circuit Court of Appeals. This precedent was adopted by a very different D.C. Circuit at a very different legal time.
But at least within the D.C. Circuit, the Commission clearly has legal authority to adopt these rules as of the 1970s. So what happens if the Commission adopts these rules today? Well, plaintiffs are going to bring a case in the Fifth Circuit challenging it. The Fifth Circuit is going to hold “No. Section 6(g) does not give you this authority,” and it’s going to get up to the Supreme Court. Even if it were to be heard in this D.C. Circuit, it’s pretty unlikely that the current D.C. Circuit or any current court would look at this the same way that the courts did in the 1970s.
Putting additional pieces on the table—this has come up in the questions—so we have the statutory interpretation question just “Does Section 6(g) empower the Agency here to adopt these substantive rules?” in the questions. And I’d say I would have loved it if we could have had another hour with Rahul and just had him answer all the questions from the audience. Really, really great questions from everyone.
Most of you are probably familiar with the Supreme Court’s recent Massachusetts — West Virginia VEPA holding, which gives us the major questions doctrine, and the major question about the noncompete rule is whether it presents a major question. And I think for those of us who listened to the oral arguments yesterday in the Biden v. Nebraska case — this is the student loan forgiveness case where the state of Nebraska—I live in Nebraska—along with several other states, have raised challenges to the administration’s student loan forgiveness. The Supreme Court seems pretty inclined to want very clear congressional authorization for executive action on the order of, say, 400 or so billion dollars. And, oh, look what we have here, a rule that’s anticipating effects on the order of $300 billion a year. So I think it’s pretty likely that the Supreme Court would look at this and say, “Hey. You’ve long not acted here. There’s a lot of state regulation here. This is newfound authority with major political and economic significance. This is a major question.”
So those are kind of the — that’s kind of the initial lay of the land for the does the Agency have legal authority to adopt these rules in the first place without even getting to the substance of what the rules are.
Elyse Dorsey: Thanks, Gus. Yeah. As you mentioned, there’s quite a lot going on here, and that was a very helpful kind of overview to give us, as you said, the lay of the land to further discuss what’s going on here.
And so, Matt, I wanted to ask you next on this particular rulemaking and other recent FTC activities—including the Section 5 statement that Rahul discussed a little bit this morning—have raised questions about the scope of the FTC’s Section 5 authority generally. And so, how does this rule and these other activities fall into or outside of the scope of that authority?
Matthew Sipe: Great. Thank you so much, and thanks for having me. Like Gus, I will do my best to not fall into lecturing overlong. But for the record, this will be on the exam, so I hope folks are taking notes.
So unlike the rulemaking issue that Gus just teed up, we actually do have pretty strong precedent here from none other than SCOTUS telling us affirmatively, explicitly that the scope of the FTC Act Section 5 is broader than the combined scope of the Sherman and Clayton Act. We can look at Indiana Federation of Dentists. We can look at a bunch of cases. We know that unfair methods of competition is broader than the common law of restraint of trade jurisprudence that fed into the Sherman Act. We know that a violation of the Sherman and Clayton Act is an FTC Section 5 violation, but now the remaining question is, “How far beyond that does the scope of Section 5 extend?”
Now, this part is like the rulemaking authority issue. It turns out we actually need to look back more than half a century before we find cases where a Court of Appeals ratified the FTC’s attempt to reach beyond the limits of the Sherman and Clayton Act. We have recent settlements but not recent case law. Instead, the most recent record that we have is actually a string of defeats in the ’80s and ’90s: Boys Cascade, OAG, the Ethyl Du Pont case. It’s important to emphasize that these cases didn’t reject the general principle of Section 5 being broader than the Sherman and Clayton Act. But in each case, what happens is the Court faulted the FTC for not fully carrying its burden. In the Ethyl case, they were looking for more indicia of oppression. In Boys Cascade, they wanted more proof of anticompetitive effect. They were looking for a greater showing. And so, I think that’s a particular issue here because the FTC is essentially proposing a per se rule. That is to say, they are proposing a rule such that no proof or evidence is needed.
Now, arguably, that’s what they are doing right now in the rulemaking factfinding process, but that evidence is necessarily not the case, industry, or firm-specific. It is a blanket rule. And so, I think the gist of these cases, the gestalt of them, is apt to flare up.
Instead, where we have the best track record of so-called standalone Section 5 success are places where there are timing issues or gaps in scope that prevent the Sherman and Clayton Acts from exercising supervision. So for example—Deputy Director Rahul keyed up this— invitations are attempts to collude. Section 1 of the Sherman Act only prohibits actual contracts, combinations, or conspiracies. You can contrast that with Section 2, which prohibits attempts to monopolize. So it’s a gap-filling exercise.
We’ve got unilateral facilitating practices, things that make it easier to collude, and incipient violations. So in other words, what we have in terms of success here, of going beyond the scope of the Sherman and Clayton Acts, are activities and practices that we think will lead to one of those violations, or there’s some gap that prevents us from getting there like this attempt pull. This proposed rulemaking seems different in kind to me. We know and we’re comfortable with the idea that noncompetes are potentially subject to scrutiny as Sherman Act violations. They were — if you go back far enough, they could be a common law violation. They needed to be reasonable in scope, scale, and duration. We can go back to Judge Taft and Addyston Pipe and Steel talking about noncompetes. And we have more recent case law from, among others, the Second Circuit telling us, “Yes. Noncompetes are potentially Sherman Act Section 1 violations.”
So this is going beyond the Sherman Act in a really different way than the track record of success we have so far. We are taking something that is already within the scope of Sherman Act scrutiny and upgrading it to a per se violation. So it’s not about gap-filling. It’s not about catching violations in their incipiency. It’s lowering the bar in terms of proof. And so, if I wanted to be less charitable, I’d say it’s taking a potential Sherman Act violation and just making sure the FTC always wins. And it’s doing so by dodging precisely the same burdens that courts in the ’80s and ’90s faulted it for doing.
Well, I think this also feeds into potential issues of comparative scope with the Department of Justice. Deputy Director Rahul pointed out diverse approaches cause confusion. Well, now we have a problem because the FTC has exemption in terms of what industries Section 5 applies to: common carriers, banks, airlines. They’re exclusively overseen by the Department of Justice due to FTC Act exemptions. And we have recent case law from the Ninth Circuit saying, “This has real teeth, and this is a real outer boundary.” So what we’re going to have it’s a rule such that we have a per se violation for noncompetes in some industries, and a rule of reason analysis in others. And so, if diverse approaches cause confusion, there we are.
I also think this potentially feeds into issues of nondelegation. Other folks might want to talk about that. And I won’t go into too much depth, but if Section 5 is untethered from the Sherman and Clayton Acts in this way, then the question becomes “What is our intelligible principle that we have backing up this delegation of authority to the executive branch to exercise legislative discretion?” And if we’re looking at recent cases, it’s like the writing is on the wall there.
Just like Gus was talking about, this Court, in this moment, seems more poised than ever to envision a muscular version of nondelegation doctrine, and if we’re looking back at the cases that we have analyzing grants of authority like this, the Court has tended to strike them down. The closest example we might have to a statute like Section 5, if untethered from the Sherman and Clayton Acts, would be the National Industrial Recovery Act that prohibited — or that authorized the president to promulgate codes of fair competition. And in that very case, the Supreme Court says, “This violates nondelegation doctrine, and it contrasts it to the FTC.” And it says, “Unlike the FTC” — or “The FTC is okay and doesn’t run into a nondelegation problem because it proceeds by adjudication rather than rulemaking.” So it’s like they’re undermining their security in other areas. Like, all these issues I think of as interrelated and collectively undermining the ground on which the FTC stands.
Elyse Dorsey: Thanks, Matt. Yeah. Again, just kind of a lot of different legal rules potentially at play here and kind of fading into what’s been already again a very robust discussion of what the FTC’s authority is and what the goals are here. And I think that’s kind of a good transition into some of the questions about in addition to the FTC’s individual authority to create UMC rules, some of the constitutional law questions that have also arisen.
Corbin, one potential issue that’s been a focus of discussion—and you’ve already alluded to in the conversation so far today—is the major questions doctrine. So you can you talk to us a little bit more about what that doctrine is and how it might apply here?
Corbin Barthold: Yes. Thank you and thank you to FedSoc for having me. And the first thing I should say is all honor to Rahul for coming to speak to us. And I want that to be totally clear throughout my comments how much I appreciate your coming in to speak because now I’m going to start stirring the pot.
Let me parachute into that issue from kind of above because Matt segued it perfectly. Given current trends—which is, of course, a big caveat: the Court as it currently stands, reading the landscape as it is—the question to me—if the FTC continues on the path that we heard in the opening comments and what the policy statement is, and just kind of everything goes the way it’s looking, and they get up to the Supreme Court—will they lose just on a factual thing? This will not be allowed. This noncompete rule is voided on some narrow thing, like “You don’t have 6(g) authority within the statute.” Or is this going to be something where the FTC finds that it has set itself back really badly in a bigger sense?
So I think our entire constitutional system right now is beset by a problem of brinksmanship. It’s coming from many different actors. There’s a lot of finger-pointing about who’s ultimately at fault, but I think we’re seeing the FTC as one player in that game right here. And if they get up and bring this rule, they could be the litigant that loses Chevron deference and gets it taken away. They could be the litigant that leads to nondelegation being revived. They could be the litigant that — and this one would really fit neatly. They could be the litigant that gets Humphrey’s Executor overturned. If they are going to wield this much power, I don’t understand why these commissioners should be independent. That makes no sense to me.
So there are lots of — there’s a minefield of ways that the FTC could find itself with less power than it started out of this case beyond just losing on the merits here. So there are all those pieces around there, and then one cog that we’ll now parachute down into is major questions. Gus set me up very nicely. I appreciate it, so now I can kind of get into the weeds a little more.
It’s a very intuitive concept on one level. As we all probably here know Scalia — Justice Scalia put it very well. We don’t assume that Congress hides elephants in mouseholes. And that’s kind of intuitive, and that makes sense. I do wonder if there might be some regret from the Court in making it into this doctrine. It’s the major questions doctrine now, and Justice Kagan complained in dissent in West Virginia v. EPA that it was announcing the arrival of this thing. And I actually — if it were up to me, I’d take bits and pieces from the majority and the dissent. I thought Justice Kagan maybe was right to say, “Instead of announcing this as a giant separation of powers thing and a thing that we presume about how Congress operates, maybe we should just keep this as a textual construction issue and kind of — it’s a little bit of common sense that we put in the mix as we interpret statutes.” Although I disagree with her that it’s not something that could be found in the case law preexisting, notwithstanding that it had never been officially labeled, and I disagree with her that it was simply a limiting principle on Chevron deference, Justice Gorsuch pointed out it kind of has coexisted with the administrative state for as long as there’s been one.
But to return to my brinksmanship point, it was said in West Virginia that this is reserved for extraordinary cases. And yet, almost in the same breath, the majority made clear this is coming up all the time right now and that it’s kept coming up after West Virginia. As Gus pointed out, it just came up yesterday. So will making it this formal thing cause a lot of mischief where now litigants cite it endlessly and they’re constantly “Every case, let’s do this on major questions,” and they’ll regret that. And if the Court — to now, kind of say where the FTC might squeak through on this issue.
There’s all these elements here on major questions. It’s very undefined right now. It’s pretty clear that we have major economic impact here. It’s pretty clear that we have a political issue. It’s pretty clear that the FTC has just discovered a power that it didn’t have. Even Justice Brandeis, I think, would have been very surprised to see 6(g) operating this way. They found it many decades ago, but the Supreme Court was not impressed with the FTC’s strategy to create 13(b) power to get all equitable relief. I don’t think the amount of time that’s passed will impress them here either.
But on the other hand, one piece in West Virginia was “Oh, you’re pulling up an ancillary revision in doing this.” This is not ancillary. Nobody doubts that we’re talking about the core FTC power here and what does it mean. So kind of final point I’ll make on major questions before ceding the floor. On the other hand, it looks like maybe a clear major questions case. You’re trying, basically, to legislate. I’d much rather see the Supreme Court just do a narrow major questions ruling than use this as an opportunity to revive nondelegation and continue what I just mentioned, the brinksmanship, one piece of brinksmanship meeting another, one extreme act meeting another. Let’s stick with major questions.
But major questions is tough. Unfair methods of competition, what does that mean? And you can say—and I forgive if I offend anyone. I’ve heard kind of a false equivalent so far, and I’ve heard it in the literature. Some people want to say, “Oh it’s just the Sherman Act.” And some people want to say, “Oh it’s the spirit of the antitrust laws I heard tend to negatively affect competitive conditions.” I have no idea what that means. I don’t know what it means after reading the policy statement. It seems to mean anything that’s unfair in a cosmic sense almost. And neither of those are satisfactory.
How would we get to the proper interpretation, which I would put to you is the antitrust laws plus unforeseeable new practices that we want to nip in the bud, which is not noncompetes, which have existed for hundreds of years. This is anathema. I’m at a FedSoc event. How can I say this? But look to the legislative history. Legislative history is actually the only way to really understand what “unfair methods of competition” means. And you might go “Oh well, Congress should just do a better law. They should put in more detail.” Well, that was the whole problem. You go to the legislative history, and these senators and these House members, this was not in our modern sort of Fox News, MSNBC, “Oh they’re all too partisan, and Congress is broken.” They tried really hard to flesh out unfair methods of competition, and they decided they couldn’t do it. If we make this big, long list, new things will come up. We want the FTC to have flexibility. But that’s all in the legislative history.
So how do you get to that nice narrow proper meaning? And even if you get to that meaning, there’s clear major questions cases that would roll into that, so even under the proper interpretation, I would agree that the FTC has a lot of power in big situations. There are monopolistic practices that can have multibillion-dollar effects, huge corporate titan entities that I think would fit in that really vague phrase.
So I hope that’s been somewhat coherent. The bottom line here is that you get into major questions, and on the surface, it does look like it’s an easy win for the challengers, but there’s actually a real bog here in actually defining out major questions and figuring out what it means. And I can see the FTC, having some very strong arguments of using this case to say, “Are you sure you want to take West Virginia v. EPA and run with it and start applying it all over the place?” and encourage the Court to limit.
Elyse Dorsey: Great. Yeah. So I think before we turn to kind of refocus from the legal to the economic evidence here, Gus or Matt, any kind of additional thoughts or responses to anything you’ve heard so far?
Matthew Sipe: It looks like—I’ll let you go first, Gus.
Gus Hurwitz: Oh, I was waiting to see if you had anything. I know in the interest of time I don’t want to jump in and say too much other than I’ll agree major questions doctrine is a chimera. It is hard to know what it actually means. Is it a nondelegation doctrine? Is it a canon of construction? Is it a limitation on Chevron? And is it all the above? Is it none of the above? So we’re starting to see and will continue to see this doctrine develop. And this could be an important case in—or this rule could be important in its development.
One thing that I am watching the Axon case, which has nothing to do with these issues but has to deal with whether a defendant can — or a party can challenge Agency action in district court on constitutionality grounds prior to finality of Agency action. The rulemaking process can take a long time, and I’m wondering whether we’re going to see any parties trying to jump the gun on the rule-making process here, but there will be litigation, and we will probably also — we might, if you have time, discuss a bit about Chevron today and how the Agency’s action, separate from but in similar ways to the major questions doctrine, might run into deference issues in the courts.
Matthew Sipe: I just wanted to really quickly just touch on the Humphrey’s Executor of it all that Corbin mentioned just to unpack for the less wonky folks in the audience maybe. We have this case, Humphrey’s Executor, that upholds the constitutionality of the structure of the FTC for-cause removal for these commissioners. And in so doing, it relies on this characterization of the FTC that more modern cases have undermined. It’s this idea that the FTC is apolitical, that it’s uniquely expert, that it’s not exercising quasi-executive functions. And in all the cases we have since then—Free Enterprise Fund, Seila Law—the Court tells us “Yes, if an agency looks like that, then the for-cause removal is okay, but we are not certain anymore that that description applies to the FTC.”
They have been sowing. They have been leaving the trail of breadcrumbs on this already that Humphrey’s Executor is cabined to kind of its holding in that the facts maybe don’t hold up. And so, I just want to push on the optics of this. If one of the planks of Humphrey’s Executor is it is an apolitical agency, the optics of moving forward with this expansion of the FTC’s authority at a time when it is three Democrats and two empty chairs, I think it doesn’t feed directly into the law, but it is—it’s a bad time to be testing that particular boundary.
Gus Hurwitz: I’ll just quickly add on that point with the Axon case. Humphrey’s Executor might be in play. And I’ve been wondering with the Axon case whether the justices formally or informally might take note of this proposed rulemaking. And I’ve wondered whether Axon counsel should try to submit a supplemental brief to the Court just to put them on notice. “Hey, you guys might be concerned about how the Agency’s acting here. It has relevance.”
Corbin Barthold: And I would just quickly add, it’s interesting that we are talking about the interplay of all three branches here, and the way that I would be the FTC is that it should strive to be subordinate to all of them because it’s not any of those branches. I mean, technically, it’s in the executive, but it’s this new thing we made up in the New Deal — or sorry, 1914 and then expanded the concept.
So there’s even a case to be made, and this would be actually a good way to go back. I kind of hope for a narrow loss on the Supreme Court, to be honest. And another way that that could happen is — look. The judiciary’s interpreting the Sherman Act and the antitrust laws to move toward rule of reason, and the FTC has decided it can go in completely the opposite direction. Yes, okay. It’s broader than the Sherman Act, but I keep hearing that unlocked to broader than the Sherman Act means anything goes, and the Supreme Court can say, “No. Whatever that penumbra is—to borrow a term—it doesn’t allow you to make per se rules. That is not how we have interpreted the antitrust laws these days, and that would be a potentially narrow ruling to address this issue.
Elyse Dorsey: Great. Yeah. And so, we’ve been, again, kind of focusing our discussion so far on some of the potential thorny legal issues that might come up, but outside of that and kind of refocusing the discussion for a little bit here, there’s also a lot of empirical work that’s been done looking at how noncompete clauses are actually established, implemented throughout the economy, and what their effects are.
Evan, you’ve done a ton of work here, and I will say I’ve not personally started reading all of the comments the FTC has received, but I’ve heard that a lot of them are from more individual consumers who are responding very positively to this role. So can you kind of tell us about your work here, and what you’ve seen, and kind of the basis on which the FTC is building this role?
Evan Starr: Yeah. Thanks so much, Elyse, and thanks to the FedSoc for having me. It’s a real pleasure to be here.
So I’m an economist, and I’ve been researching restrictive covenants and noncompete agreements for about the last decade or so. And I think it’s worth pausing for just a moment and thinking about why the FTC did this and why we’re talking about this now. And effectively, what we’ve seen over the last decade is an enormous outpouring of research on the use of restrictive covenants and how they impact workers and firms, and competition in society. And I think for most of the history of noncompetes, which of course, date back 600 years, we never had any evidence like that, and so we were debating various theories about contracting in the labor market. And I think what that most of the evidence has done is kind of upended that debate. So since I’ve been working on this, I’ve had the joy of having my findings being used by both sides of this debate, and there is nuance to get into. But since I can’t really talk about this forever, what I want to do is briefly summarize the theoretical tensions in this debate and then highlight what some of the research shows.
So when we think theoretically, there are generally two perspectives on noncompetes. The first is that noncompete agreements are, in general, anti-competitive. And it’s not too hard to see this view as Rahul said. It’s in the name. They are restraints of trade and the labor market and in the product market. And so, if a worker wants to get a better job in their chosen industry, then they may not be able to. And so, even if they got a job offer, they couldn’t even leverage that for a raise, and so what you’re going to see is reduced wages. You’ll see reduced mobility between firms in the industry, and you’ll see reduced entrepreneurship.
There’s a second prong of this argument which says, “Well, let’s think about what happens when noncompete agreements are used en masse.” If there’s a labor market where, let’s say, 50 or 60 percent are in the glass industry that Rahul talked about, almost every worker’s bound by a noncompete. What does that market look like? And you might bring an individual case and think that this is a worker who signed it, and it’s legitimate, but what about the aggregate effects? In that industry, who’s going to start a new firm? Who’s going to change—who’s going to change firms? And so, there are competitive harms in that case as well.
So what’s the counterpoint? Well, the counterpoint is that noncompete agreements can potentially be growth competitive. Workers, in some view as the labor market, they wouldn’t agree to restrictions on post-employment competition. If you’re going to say I can’t take another job in the industry for two years after I leave, a savvy worker may not want to agree to that without something extra in exchange. And if you think labor markets aren’t competitive, then firms wouldn’t give workers anything extra unless they, too, benefit.
And so, the theory — the pro-competitive theory for noncompete agreements suggests that whenever we see noncompete agreements, it’s because firms benefit and becomes workers’ benefit. And that typically relies on the resolution of the hold-up problem where the firm wants to give the worker a trade secret, but they’re scared that the worker would go across the street and start a competitor, and so the noncompete agreement solves that problem and thus, saves the firm from risking the misappropriation of its investment.
Okay. So that’s kind of the pure form of both of these theories. And I think what we’ve seen in the last decade is a lot of evidence. And so, let me just run through some of those points here.
The first thing to note is the use of noncompete agreements. It wasn’t until 2014 when we really began to understand how common these were. This is where in one of my studies we found that 18 percent of workers are bound by noncompete agreements. There’s been many surveys since then. All of them suggest numbers in that range, some higher, some lower. If you survey firms, you’ll learn, for example, that 30 percent of firms use noncompete agreements with every worker. And so, it may not be surprising then if somebody from [inaudible 64:11] and with every single worker that the typical worker bound by noncompete agreement is not some executive. It’s not some highly paid tech worker. It’s an hourly-paid worker who’s got median earnings of about $14 an hour. And so, that’s just the evidence on the use of these restrictions.
The evidence on the potential harm or benefits of noncompete agreements comes in several varieties. And let me just summarize what I think are the best studies are. One is that if you think noncompete agreements are good—are good for workers, are good for firms—then when noncompete agreements are banned, workers should then be hurt, and firms should be hurt. And so, we have several natural experiments looking at exactly that, for low-wage workers and for high-wage workers. And both of those studies find the same thing that when you ban noncompete agreements for low-wage workers and for high-wage workers, workers benefit, mobility rises, wages rise, and entrepreneurship increases. And so, if — and there’s a broad range of studies. [Inaudible 65:05] talk more about them, but that’s kind of a brief overview.
There are other studies about harm to third parties. So when we think about what is it like in a labor market where most of the workers are bound by noncompete agreements, I’ve got a study that looks at that using some data from 2014, and what we find is that the whole labor market tends to be slower in markets where noncompete agreements are super prevalent. Wages are lower. Job offers are less frequent. Workers are less satisfied in their jobs. And that’s true for workers who have noncompete agreements and workers who don’t have noncompete agreements. And I think this is a key point about the FTC’s perspective, which is that when you impose a noncompete agreement on a worker, there’s a third-party cost. It’s effectively a tax on anybody who wants to hire that worker. And so, there are externalities associated with noncompete agreements, which the FTC calls competitive harm.
I think it’s worth noting that this is why the — there’s only one occupation for which noncompetes have been banned in the whole U.S., and that’s for lawyers. Lawyers prohibited noncompete agreements in Model Rule 5.6, and that’s been in place since about the 1960s or so. And the reason that noncompetes are prohibited among lawyers is because of concerns that clients will be harmed. And if you think that clients want to choose their attorney, and that right is sacred, if you prevent an attorney from practicing, you prevent the client from choosing their attorney. That same logic is applicable all across the labor market. Whenever a noncompete is used, it prevents other firms from hiring that worker. It prevents consumers from benefiting from the products that that individual would create if they were to be an entrepreneur.
And so, this is true even as the recent paper by Lan Shi looking at this idea in the market for executives. And what she contrasts is the fact that executives are potentially very rational and negotiate over these provisions but that other parties can be harmed even by executive noncompetes because maybe an executive is more valuable in another firm. And maybe the current firm, that has this executive, maybe they would benefit even more if they could hire somebody else. And so, in her study, what she does is quantify the investment incentives that noncompetes give and the harms that come with it, and her finding is that the optimal policy for executives is close to a ban. Okay?
So there’s a lot more to say here. I want to — there are a lot of challenges to the noncompete ban, which I’m happy to talk about on the empirical side.
I just want to conclude with one really important study, which is thinking about how much firms care about the ability to enforce noncompete agreements. So at this point in time, the Chamber of Commerce, of course, has come out and said they’re going to sue the FTC. There are many companies who are out there saying, “We need noncompete agreements.” And I think it’s an open question. Talk is cheap. It’s easy to submit a comment, but how many firms are really putting their money where their mouth is?
And so, in a recent study that’s what we look at, and we look at a policy in Washington where in 2020, Washington retroactively banned noncompete agreements for workers making under $100,000 a year. And this threshold is tied to inflation, and so it increases. I think it’s now over $110,000 or so. And so, the basic idea of this study is straightforward. It’s that if firms really value the ability to enforce workers’ noncompete agreements, then what they should be doing is taking workers who are making $99,000 a year and giving them a very small raise. Get them a small raise of just $1,000, and that gets them to the threshold, and then you have a chance of enforcing that worker’s noncompete agreement. And so, what that means is that in the empirical earnings distribution, you should—after the law comes into effect—you should see more workers at $100,000 and fewer workers at $99,000 because the workers who were at 99 are not getting raises to reach this voluntary minimum wage.
And what we find in the data covering all workers in Washington—or the near universe of workers in Washington—is we don’t find any evidence of this behavior where firms are giving workers raises to get them above this threshold. And that’s true across the board in terms of every single industry that we have. It’s true in manufacturing. It’s true in professional, technical, and scientific services. We even surveyed attorneys in Washington to ask them what’s going on, and they also told us that they didn’t expect employers to give workers raises to get to the threshold. And they told us it’s because firms tend to have other tools. They can use NDAs. They can use nonsolicitation agreements.
And so, I think the punch line for this paper is that at least for workers of 100k in Washington, which is about the 80th income — 80th percentile of the earnings distribution, firms probably really don’t care about the ability to enforce noncompete agreements. They just haven’t put their money where their mouth is. What I think that means for this debate is that it’s probably really mostly about just the highway terms.
So that’s all I have. Thanks so much. Happy to answer many more questions that you might have.
Elyse Dorsey: Yeah. Thanks, Evan. That was, again, a very helpful overview of some of the evidence here. And as you alluded to, the FTC’s proposed rule, at least, would cover not just the low-wage workers, but the high-wage workers as well, which maybe is where some of the more rubber hits the road.
And Diana, there’s been a number of criticisms of the FTC’s really broad band. And particularly, several people have cited to some of the nuances that Evan alluded to that might not be well served by such a role. So can you kind of tell us some more about some of that additional evidence and some of what else is going on here?
Diana Furchtgott-Roth: Absolutely. And I want to thank The Federalist Society for putting on this panel with all these different diverse viewpoints.
Well, I’m an economist. I’m the former chief economist at the U.S. Department of Labor, so I come about this from a labor market perspective. And the thesis of the FTC’s rule is that workers are trapped in jobs, and they cannot leave. And this is just contrary to the reality of the data that we see in the U.S. labor market. It’s not just today where the labor markets are tight but also the past 10, 20, 30 years. The Bureau of Labor Statistics shows that we have millions of job openings, 11 million unfilled jobs. And American workers move all the time.
The unemployment rate right now is 3.4 percent. It was in 2019, before the pandemic, it was also low, around 3.5 percent. We had 517 new jobs created last month. There’s massive churning in our labor market. Every year there’s about 70 million separations and about 75 million new hires. Americans are moving all the time and not just in their own areas, in their own states. Americans are leaving their states for other states as we can see from Census department data. So last year Florida, Texas, and Arizona were the largest states in terms of people moving, in terms of gains in population and jobs. California, New York, and Illinois had the largest losses. You see that Americans are moving to where the jobs are, and by the way, away from high-tax states.
We find from the business employment dynamics, from the Labor Department, that expanding companies are gaining. In the fourth quarter of 2021, for example, expanding companies gained 10 million, and shrinking companies lost 7 million. The National Longitudinal Survey looked at people born between 1957 and 1964 and found that on average people had 12 jobs between the ages of 18 and 54. People changed jobs all the time.
Also companies—because people are changing jobs all the time—companies must compete for workers in terms of good compensation packages. One D.C. tech firm has a nap room. It has a whiskey room. It provides three free meals a day. It provides free laundry services to its employees. At the low end, wages of hourly workers in many companies have about doubled over the past few years. Also, workers in large firms—large firms described as concentrated such as Google and Amazon, and Apple—they’re not always doing the same thing. They’re not all high-tech workers. There are workers in personnel, workers who are staff assistants, computer programmers. Those have transferable skills, and they do transfer to companies that pay them better jobs.
So what I want to say is that this new FTC rule — and I’m not a lawyer. I’m an economist. It’s addressing a problem that doesn’t exist. It’s addressing an artificial problem of people who the Agency sees as bound in its jobs. And take Silicon Valley. You can look at LinkedIn profiles, and you can see that people move between these firms in Silicon Valley all the time. If there are noncompete agreements, they’re certainly not bound by them. There’s constant churning. Americans are capable of getting better jobs. Americans are moving to better jobs all the time.
Thanks very much for giving me the opportunity to speak on the panel.
Svetlana Gans: Yes. Thank you so much, Diana.
And so, we have a couple questions from the audience that I think would be great for one or both of you to address. And so, one of them is on — we’ve been talking a lot about how broad the FTC’s ban is and not just between low-wage and high-wage workers, but also across very different industries and markets. And one of the questions we have is whether the FTC or you all have examined the effects of noncompetes in physician contracts in particular. And my understanding is from some of the comments that that’s something that’s gotten a lot of discussion within the comments to the FTC. I don’t know if either of you have—or anyone else, honestly—has had a chance to kind of look at what might be some of the evidence there.
Diana Furchtgott-Roth: Well, it’s a very interesting question because one of the remedies that people often suggest for the supposed problems of the workforce is higher unionization and a higher minimum wage. But where we do see lack of movement is in these unionized sectors.
We see this in nursing, for example, between hospitals where people do tend to be trapped more in union jobs. One way they’re trapped is because they cannot take their pensions with them. Other areas do have clauses where you cannot actually move. It’s not characteristic of the U.S. labor force because only 10 percent of U.S. workers are unionized and only 6 percent of private sector workers, but we do see this difficulty of moving within the union sector.
Corbin Barthold: Yeah, sure, happy to talk about the physicians. There’s only a handful of studies on physician noncompete agreements. But the real difficulty with physicians is that their labor markets and their product markets are totally intertwined. Unlike a low-wage worker, for example—who may be able to change industries, and of course, even there, there’s still industry-specific skills—physicians are going to stay in the medical industry, and so they are — can either go out on their own or can go to a particular hospital.
I think the studies that we have don’t really address the major question for physicians, which is “How do they impact patient healthcare?” We do have a study on prices, but if you just read the physician comments in the FTC’s rulemaking, it is overwhelming. The number of physicians who are writing out about the harms they’ve experienced at work because of noncompete agreements and how they’ve had to move their families far away, it’s unnerving. Physicians represent a tiny fraction of the employed population, and yet, they represent a disproportionate share of the comments.
And you’ll even see noncompetes, for example, for emergency physicians. And these are physicians who don’t even get to choose their patients. The patients just come to the emergency room for them, and yet hospitals still routinely require them to sign noncompete agreements, even though they self-finance their own education and many times don’t even have a choice about which employer they join right out of the gate. So I think many of the concerns about physician noncompete agreements are very clear. I think that if you are a physician who’s forced to sit out or leave the area because of a noncompete agreement, then the patients can suffer.
Just like the ABA banned noncompetes for lawyers because of concerns about clients, many states have begun to ban noncompete agreements for physicians including several states in the 1970s and ’80s like Massachusetts, Delaware, and Colorado. And there’s a recent wave this year even in Indiana. And so, I think there is a move concerning physicians and noncompete agreements, and there’s also evidence of what happens when your physician leaves. And that evidence tends to suggest that the workers get — the individuals get less healthcare, and they tend to end up with more expensive care when they get it, whether it’s in the emergency room or from some expensive specialist.
Gus Hurwitz: Elyse, if I could jump in and add a little bit. First, I am not an economist. I’m a mere lawyer, so I want to make a couple of comments about the use of data and the empirical work in the Notice of Proposed Rulemaking.
I want to start, though, by just noting and responding a bit to the example that, Evan, you’ve used of lawyers in the ABA rule prohibiting noncompetes. I think that it illustrates some of the complexity in understanding the purposes and mechanisms of noncompetes.
With lawyers, our ethical obligation, our relationship is to the client. It’s owned by the client, not by the firm. So noncompetes are playing a very different role with lawyers than they would play with other labor markets because if I were prohibited from competing with a firm when a client wanted to take my work elsewhere, or I wanted to leave for another opportunity, and that would prohibit the client from working with me, that creates complex ethical situations. So the purpose is very different than we might see in other industries of prohibiting them.
One of the notable things about the Notice of Proposed Rulemaking and its use of evidence is the use of and citation to studies seems to be pretty selective and favorable to the FTC’s position. And one of the notable things, the Bureau of Economic staff had done a workshop, done a lot of work on this topic. McAdams had a 2019 study. There was a workshop in 2020, which isn’t reflected in the proposed rule. And that’s not necessarily problematic in a Notice of Proposed Rulemaking. The commission is explaining why it is that they think it’s necessary for them to issue this rule, so of course, they’re going to be presenting the information, the evidence that’s favorable to that position so that folks can respond to it.
But if the Commission takes a similar approach in a final rule—the rule that it ultimately adopts and the justification that it’s going to need to put forth for it—it’s going to need to be much more balanced in the evidence that it cites to, including slightly older evidence that I expect Evan would respond is slightly older. It’s been made out of date by more recent work. That absolutely could be the case. I’m not an economist, but the courts will expect relevant, recent evidence to be cited to and discussed and explained that it’s been superseded by more recent work. So that’s something certainly to be on the lookout for, and it’s an interesting demonstration of the intersection of the substantive economic research and the procedural lawyerly stuff and how they need to play together in the rulemaking process.
Corbin Barthold: Can I tail around on that point?
Elyse Dorsey: Yeah. I think Evan had something he wanted to say for a minute, and then I’ll turn it over to you.
Corbin Barthold: Oh please. Proceed.
Evan Starr: Thanks so much. Yeah. Let me just respond briefly to both of these issues here. So, first, let me say that yes, you’re right. There is nuance here. And if we could — if we had another hour, I’d go into it a little bit more.
But let me say first on ABA Model Rule 5.6, I mean, the comment on it says that the reason they’re doing this is because it limits the client’s choice of attorney. And so, just like it would limit a hairstylist. Salons are the fifth most common litigant in noncompete-related lawsuits. And so, your choice of your attorney, your choice of your hairstylist, your choice of doctor, your choice of auto mechanic, your choice of any specialist you work with, it’s the same idea. It’s not specific to attorneys by any stretch.
When you put a noncompete on somebody, you prevent other people from interacting with that person if they have to leave the industry. And so, it is a very generalizable issue, and I don’t think you’re right that it’s very specific to lawyers. Although, I know lawyers like to say that because they want to retain their freedom to move.
And with regard to Diana’s points, I would respectfully encourage you to go read the comments of people’s experiences with noncompete agreements. I would encourage you to read the evidence on what happens when states change their policies with regards to noncompetes. I would encourage you to read the evidence on the harms of even unenforceable noncompete agreements for workers who can’t finance litigation to get out of them. I think that the claim that somehow the fact that we’ve had a great resignation or that people are moving across states is not compelling in any sense, especially not more compelling than evidence that looks at the natural experiments from state policy shots.
Diana Furchtgott-Roth: Anecdotes are not data. We have a workforce of about 165 million, and every year about 70 million people leave and about 72 or 75 million are hired. This is not unique to 2023. This is not part of the Great Resignation. America has always had vast churning and vast turnover. We’re fortunate that unemployment rates are now at record lows, but they have been at these lows beforehand.
So anybody can put in a comment saying that they have a particular problem—and I’m not saying the system is perfect. Some people do have problems, but in general, American workers are not trapped in their jobs. They’re not exploited by their employers. They have vast opportunities, and they take advantage of that.
Elyse Dorsey: Corbin.
Corbin Barthold: Yeah. I’m really enjoying the economics conversation, and I’m not qualified to get into the merits. Although, I did hear Silicon Valley, and to my understanding, California’s one of the states where there are no noncompetes, and some people cite Silicon Valley as like an example. But all of that kind of stuff goes to principles of economic growth. And Gus mentioned time and substance of economics, and I think it’s very important.
And a question that is not settled in my own mind, but it’s very important, and people who are commenting should think about this, is, is there work to be done in separating out questions of sheer economic growth or benefits and competition because if I were to give the FTC some free advice that I doubt they’ll listen to in formulating this rule the way they’ve promoted it, I think the workers’ rights — sorry. The competition dog is being wagged by the workers’ rights tail. They come out up front with the benefits to workers. And that’s all well and good and would be great in a congressional conversation.
But then when you get into “Well, how is it competition related?” I heard a bit in the opening remarks about like effects on right to entry, and okay, now we are getting somewhere. My head goes immediately to rule of reason. That’s not a per se rule issue, but I would think that this rule would have a much stronger chance of going through and getting somewhere if the FTC were to sort these things out a little more and focus on talking about real competitive effects, which would make much of this debate, albeit interesting and maybe very good for Congress, not what the FTC should be focusing its energy on.
Elyse Dorsey: Yeah. All really good points again, and I think this just goes to show how much we’ll continue to hear about these topics and more.
Another question we had from the audience was, Evan, would you be able to discuss any potential benefits that might come from a disclosure rule. So potentially a disclosure of noncompete agreement prior to accepting a job offer or maybe some more information to consumers in terms of what actually is enforceable in this state. Was that something that might be more of a middle ground that might be helpful? Is that something you’ve gotten into in your work at all?
Evan Starr: Sure. Yeah. Happy to. So I think the question is referring to a study that I wrote back in — well, I wrote it a long time ago. It was published in 2021, but it looks at early-notice noncompetes versus what we call late-notice noncompetes. And the idea is that a late-notice noncompete is one’s that sprung on you on Day One when you don’t have a choice but to sign it, maybe moved your family, and so there’s no really no proper negotiation that can happen over those sorts of agreements. Sometimes it’s just a click through a screen. And early-notice noncompete agreements were ones that come before you take the job. Maybe it’s with the initial job offer, for example. And this gives you at least a chance to decide if you’re willing to agree to that provision if you want to negotiate over it.
And so, in that study what we found is that workers with late-notice noncompete agreements were worse off relative to workers with early-notice noncompete agreements in terms of their wages, in terms of their training, job satisfaction, etc. And so, I think there’s — this comes up all the time. People will say, “Well, why not just solve the problem with early notice?”
And I think there’s two natural responses to that. One is that early notice alone isn’t necessarily associated with positive non-earnings or benefits for workers. That study’s a correlational study, and in fact, there’s people that like to cherry-pick some of those results, but there are competing results in that same paper. And I think that the broader problem with studies of just noncompete use is that it’s actually very difficult to distill the effect of noncompete agreements from studies of observational studies, and the reason is because noncompete agreements are never used by themselves. In fact, noncompete agreements almost always tend to come with nondisclosure agreements and with agreements not to solicit clients or coworkers.
And so, when you compare a worker with a noncompete versus a worker without a noncompete, you actually have a problem with what we call simultaneous treatments. You’re comparing a worker with all sorts of provisions bundled together versus a worker who has some other set of combinations together. And in fact, most of those workers tend to have none of those restrictions. And so, in a recent paper, what we show is that if you compare workers with at least a Non-Disclosure Agreement to workers with all four of these restrictions, you get the opposite earnings prediction which is that you see a negative rates effective of about three to seven percent versus workers — if you compare to workers with none of the restrictions, you get a positive earnings differential. And so, the result is that—and I apologize for the wonkiness—is that you have to think about what the right comparison is, and the studies of just noncompete agreements are probably not giving you the right comparison that you want.
Elyse Dorsey: Great. Yeah. That’s some really helpful information. Again, I think a lot to think about here.
And we are just about at the end of our time. And I wanted to make sure to thank you all but also give you an opportunity. Any kind of final last thoughts? Anything we should be expecting in the months and years to come?
Diana Furchtgott-Roth: Well, I just want to say, just to finish up, that this is not a systemic problem if there are individual problems in industries. This is something that states can take care of. This is outside of the Federal Trade Commission’s mission. And the FTC has many, many problems, and it should concentrate on other problems rather than this.
Evan Starr: Thanks. Yeah. I can’t speak to the FTC’s authority on this issue, and they’re going to do what they’re going to do, but I would respectfully disagree with Diana on multiple levels. And we see noncompete agreements in volunteer contracts in California where they’ve been unenforceable since 1872, so my sense is that this is a big issue. I mean, it’s something that affects a lot of workers and a lot of firms. I think there’s other tools that are available.
In terms of my expectations, I know the FTC’s been thinking about this for a long time. They held several previous forums and events on it. They’re aware that executives have access to trade secrets. They’ve thought about all of these issues. I’m sure they’ve thought about the major questions doctrine. They’ve thought about all these things, and they think it’s within their purview. I wouldn’t expect huge changes to the rule. I think the only thing that’s going to come out are anecdotes and, as Diana said, the anecdotes are actually in this case, more likely to support the FTC’s case.
There is some new research that I’m aware of which is not publicly available yet, which is also going to support the FTC’s case. And so, I expect them to continue moving forward with a rule along these lines.
Steven Schaefer: Well, thank you to all of our experts today as well as to our audience for joining us to explore additional content like this: webinars, podcasts, and white papers. Please join us at fedsoc.org. That’s fedsoc.org. Thank you.
Gibson, Dunn & Crutcher, LLP
Deputy Director, Bureau of Competition
Federal Trade Commission
Internet Policy Counsel and Director of Appellate Litigation
Director, Center for Energy, Climate, and Environment and The Herbert and Joyce Morgan Fellow in Energy and Environmental Policy
The Heritage Foundation
Professor of Law and the Menard Director of the Nebraska Governance and Technology Center
University of Nebraska College of Law
Assistant Professor of Law
University of Baltimore
Robert H. Smith School of Business, University of Maryland
Kirkland & Ellis LLP
Federalist Society’s Corporations, Securities, & Antitrust Practice Group
Federalist Society’s Labor & Employment Law Practice Group