February 10, 2023
Stroock Client Alert
By: Allen H. Denson, Daniel C. Fishbein
Much has been written in just the few short weeks since the Federal Trade Commission announced its sweeping proposed rule to ban the use of non-competes by employers. Pundits have labeled the proposed rule a defining move by FTC Chair Lina Khan. Experts on antitrust have written about how the agency is following the Justice Department into an ever-expanding foray into combatting wage-fixing and labor-related competition issues. And economists have opined on the benefits a stiff ban on non-competes would provide employees by increasing both wages and entrepreneurship in specialized fields.
Less apparent in the swirl of thought leadership is the corollary effect the rule has for consumer protection – a coextensive mandate for the FTC alongside promoting fair competition. According to dissenting Commissioner Christine S. Wilson, the Commission has not established a record demonstrating that the rulemaking remedies a harm to consumers.[1] Because the rule’s purported rationale partially involves consumer protection, litigation over the validity of the non-compete ban may have implications for the FTC’s authority over consumer protection.
To recap, on January 5, the FTC proposed a near-complete ban on non-compete clauses in employment contracts, including a retroactive elimination of existing agreements.[2] According to the FTC, the proposed rule is based on its finding that non-competes constitute an unfair method of competition, violating Section 5 of the FTC Act.[3] Notably, the FTC’s commissioners voted 3-1 in favor of curbing non-competes, with Commissioner Khan stating that, “[b]y ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”[4] In its press release, the voting majority opined that non-competes “ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the health care sector.”[5]
The lone dissenter, Commissioner Wilson spent fourteen pages outlaying her case for why the FTC does not have authority to issue such a sweeping edict. According to Commissioner Wilson:
|
The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction. The Commission undertakes this radical departure despite what appears at this time to be a lack of clear evidence to support the proposed rule. What little enforcement experience the agency has with employee non-compete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition. Lacking enforcement experience, the Commission turns to academic literature – but the current record shows that studies in this area are scant, contain mixed results, and provide insufficient support for the scope of the proposed rule.[6] |
Federal agencies are typically provided wide latitude to make rules within their legal mandate. Under the Administrative Procedure Act, an agency decision may be set aside only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[7]
But sweeping rules like the proposed non-compete ban might overstep the FTC’s authority. According to Commissioner Wilson:
|
Setting aside the substance of the rule, the Commission’s competition rulemaking authority itself certainly will be challenged. The NPRM is vulnerable to meritorious challenges that (1) the Commission lacks authority to engage in “unfair methods of competition” rulemaking, (2) the major questions doctrine addressed in West Virginia v. EPA applies, and the Commission lacks clear Congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine, particularly because the Commission has replaced the consumer welfare standard with one of multiple goals.[8] |
Although the Commission has authority under the FTC Act to regulate competition, it is far from clear that Congress intended the Commission to police labor markets given the agency’s historical record dating back more than one hundred years. Section 5 of the FTC Act, prohibits “unfair or deceptive acts or practices in or affecting commerce.”[9] In November 2022, the FTC released a lengthy policy statement[10] regarding the scope of unfair methods of competition under Section 5, which, in sum, abandoned its long standing “rule of reason” when analyzing the scope of its Section 5 authority in favor of an expansive “near-per se approach.”[11] This generous reading of the FTC’s limits is in direct conflict with recent cases upon which United States courts of appeals have analyzed non-compete clauses when applying the FTC Act.[12]
Enter the major questions doctrine. In the recently decided case West Virginia v. EPA,[13] Chief Justice Roberts, writing for the majority, held that for an agency to make “decisions of vast economic and political significance,” Congress must have clearly granted the agency authority to do so.[14] Under a multifactor test set forth by concurring Justice Gorsuch, the FTC’s non-compete ban would invite scrutiny by the Court and could possibly be overturned.[15]
Dissenting Commissioner Wilson also believes that the FTC’s non-compete ban violates the non-delegation doctrine. Under the doctrine, the Supreme Court long ago held that Congress cannot delegate its legislative power to another branch of government, including independent agencies like the FTC.[16] Commissioner Wilson reasoned that this is because the FTC abandoned its consumer welfare standard by which it previously assessed anti-competition issues[17] in favor of its recent November 2022 policy statement.[18] According to Commissioner Wilson, the majority of commissioners base the conclusion of their proposed rule on limited evidentiary support that non-competes benefit consumers.[19]
* * * *
Late last year, the Supreme Court heard arguments in Axon Enterprise v. Federal Trade Commission[20] and Securities and Exchange Commission v. Cochran,[21] in which plaintiffs seek to upend the traditional framework for challenging an agency proceeding – i.e., waiting until the conclusion of the agency’s action. Also making its way through the courts is FTC v. Walmart Inc.,[22] in which Walmart argues that the FTC’s appointment and removal process for commissioners violates the Constitution and, therefore, the FTC does not have power to initiate litigation. And in 2021, the Supreme Court in AMG Capital Management LLC[23] unanimously held that Congress never intended to give the FTC authority to collect restitution or disgorgement of ill-gotten gains as an equitable relief power.[24]
If these cases are any indication, the FTC’s proposed non-compete ban will face meaningful scrutiny and invite the Supreme Court to further weigh in on the scope of the FTC’s enforcement authority. If Commissioner Wilson’s dissent is any indication, the Court could hold that the “FTC only has substantive consumer protection rulemaking power, and lacks the authority to engage in substantive competition rulemaking.”[25] According to Commissioner Wilson, “this uncertainty about the language of the statute will be a starting point for challenges of the Non-Compete Clause Rule.”[26] Yet, a decision premised on this distinction between substantive consumer protection versus substantive competition rulemaking power could go farther, further defining the contours of the FTC’s consumer protection power altogether.
The result of a potential non-compete case may further redefine who faces FTC scrutiny, what business practices they use, and how the FTC accomplishes its rulemaking and enforcement priorities. Stay tuned for further developments.
[1] Dissenting Statement of Commissioner Christine S. Wilson Regarding the Notice of Proposed Rulemaking for the Non-Compete Clause Rule (Jan. 5, 2023) https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetewilsondissent.pdf (hereinafter, Wilson Non-Compete Dissent), at 1.
[2] Press Release, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023) https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
[3] Id. In conjunction with the ban, the FTC also announced actions against three companies concerning their non-compete business practices.
[4] Id.
[5] Id.
[6] Wilson Non-Compete Dissent at 1.
[7] 5 U.S.C. § 706(2)(A); see e.g., FCC v. Prometheus Radio Project, 592 U.S. ____ (2021) (FCC’s decision to repeal or modify three of its media ownership rules was not arbitrary or capricious for purposes of the APA).
[8] Wilson Non-Compete Dissent at 1–2.
[9] 15 U.S. Code § 45.
[10] Statement of the Commission on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (July 9, 2021), https://www.ftc.gov/system/files/documents/public_statements/1591706/p210100commnstmtwithdrawalsec5enforcement.pdf.
[11] Dissenting Statement of Commissioner Christine S. Wilson Regarding the “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act” (Nov. 10, 2022) https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf.
[12] See e.g., Snap-On Tools Corp. v. Fed. Trade Comm’n, 321 F.2d 825, 837 (7th Cir. 1963).
[13] 142 S. Ct. 2587 (2022).
[14] Id. at 2605.
[15] Id. at 2616 Under Justice Gorsuch’s multifactor inquiry, agency action will trigger the application of the major questions doctrine if the agency claims, among other things, the power to (1) resolve a matter of great political significance, (2) regulate a significant portion of the American economy, or (3) intrude in an area that is the particular domain of state law. Id. at 2620–2622.
[16] A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).
[17] Wilson, Welfare Standards Underlying Antitrust Enforcement: What You Measure is What You Get (Feb. 15, 2019) https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf.
[18] Wilson Non-Compete Dissent at 2–3.
[19] Id.
[20] 21-86.
[21] 21-1239.
[22] 1:22-cv-03372 (N.D. Ill.).
[23] 141 S. Ct. 1341 (2021).
[24] Id.
[25] Wilson Non-Compete Dissent at 11.
[26] Id.
February 10, 2023
Stroock Client Alert
By: Allen H. Denson, Daniel C. Fishbein
Much has been written in just the few short weeks since the Federal Trade Commission announced its sweeping proposed rule to ban the use of non-competes by employers. Pundits have labeled the proposed rule a defining move by FTC Chair Lina Khan. Experts on antitrust have written about how the agency is following the Justice Department into an ever-expanding foray into combatting wage-fixing and labor-related competition issues. And economists have opined on the benefits a stiff ban on non-competes would provide employees by increasing both wages and entrepreneurship in specialized fields.
Less apparent in the swirl of thought leadership is the corollary effect the rule has for consumer protection – a coextensive mandate for the FTC alongside promoting fair competition. According to dissenting Commissioner Christine S. Wilson, the Commission has not established a record demonstrating that the rulemaking remedies a harm to consumers.[1] Because the rule’s purported rationale partially involves consumer protection, litigation over the validity of the non-compete ban may have implications for the FTC’s authority over consumer protection.
To recap, on January 5, the FTC proposed a near-complete ban on non-compete clauses in employment contracts, including a retroactive elimination of existing agreements.[2] According to the FTC, the proposed rule is based on its finding that non-competes constitute an unfair method of competition, violating Section 5 of the FTC Act.[3] Notably, the FTC’s commissioners voted 3-1 in favor of curbing non-competes, with Commissioner Khan stating that, “[b]y ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”[4] In its press release, the voting majority opined that non-competes “ultimately harms consumers; in markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the health care sector.”[5]
The lone dissenter, Commissioner Wilson spent fourteen pages outlaying her case for why the FTC does not have authority to issue such a sweeping edict. According to Commissioner Wilson:
|
The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction. The Commission undertakes this radical departure despite what appears at this time to be a lack of clear evidence to support the proposed rule. What little enforcement experience the agency has with employee non-compete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition. Lacking enforcement experience, the Commission turns to academic literature – but the current record shows that studies in this area are scant, contain mixed results, and provide insufficient support for the scope of the proposed rule.[6] |
Federal agencies are typically provided wide latitude to make rules within their legal mandate. Under the Administrative Procedure Act, an agency decision may be set aside only if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[7]
But sweeping rules like the proposed non-compete ban might overstep the FTC’s authority. According to Commissioner Wilson:
|
Setting aside the substance of the rule, the Commission’s competition rulemaking authority itself certainly will be challenged. The NPRM is vulnerable to meritorious challenges that (1) the Commission lacks authority to engage in “unfair methods of competition” rulemaking, (2) the major questions doctrine addressed in West Virginia v. EPA applies, and the Commission lacks clear Congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine, particularly because the Commission has replaced the consumer welfare standard with one of multiple goals.[8] |
Although the Commission has authority under the FTC Act to regulate competition, it is far from clear that Congress intended the Commission to police labor markets given the agency’s historical record dating back more than one hundred years. Section 5 of the FTC Act, prohibits “unfair or deceptive acts or practices in or affecting commerce.”[9] In November 2022, the FTC released a lengthy policy statement[10] regarding the scope of unfair methods of competition under Section 5, which, in sum, abandoned its long standing “rule of reason” when analyzing the scope of its Section 5 authority in favor of an expansive “near-per se approach.”[11] This generous reading of the FTC’s limits is in direct conflict with recent cases upon which United States courts of appeals have analyzed non-compete clauses when applying the FTC Act.[12]
Enter the major questions doctrine. In the recently decided case West Virginia v. EPA,[13] Chief Justice Roberts, writing for the majority, held that for an agency to make “decisions of vast economic and political significance,” Congress must have clearly granted the agency authority to do so.[14] Under a multifactor test set forth by concurring Justice Gorsuch, the FTC’s non-compete ban would invite scrutiny by the Court and could possibly be overturned.[15]
Dissenting Commissioner Wilson also believes that the FTC’s non-compete ban violates the non-delegation doctrine. Under the doctrine, the Supreme Court long ago held that Congress cannot delegate its legislative power to another branch of government, including independent agencies like the FTC.[16] Commissioner Wilson reasoned that this is because the FTC abandoned its consumer welfare standard by which it previously assessed anti-competition issues[17] in favor of its recent November 2022 policy statement.[18] According to Commissioner Wilson, the majority of commissioners base the conclusion of their proposed rule on limited evidentiary support that non-competes benefit consumers.[19]
* * * *
Late last year, the Supreme Court heard arguments in Axon Enterprise v. Federal Trade Commission[20] and Securities and Exchange Commission v. Cochran,[21] in which plaintiffs seek to upend the traditional framework for challenging an agency proceeding – i.e., waiting until the conclusion of the agency’s action. Also making its way through the courts is FTC v. Walmart Inc.,[22] in which Walmart argues that the FTC’s appointment and removal process for commissioners violates the Constitution and, therefore, the FTC does not have power to initiate litigation. And in 2021, the Supreme Court in AMG Capital Management LLC[23] unanimously held that Congress never intended to give the FTC authority to collect restitution or disgorgement of ill-gotten gains as an equitable relief power.[24]
If these cases are any indication, the FTC’s proposed non-compete ban will face meaningful scrutiny and invite the Supreme Court to further weigh in on the scope of the FTC’s enforcement authority. If Commissioner Wilson’s dissent is any indication, the Court could hold that the “FTC only has substantive consumer protection rulemaking power, and lacks the authority to engage in substantive competition rulemaking.”[25] According to Commissioner Wilson, “this uncertainty about the language of the statute will be a starting point for challenges of the Non-Compete Clause Rule.”[26] Yet, a decision premised on this distinction between substantive consumer protection versus substantive competition rulemaking power could go farther, further defining the contours of the FTC’s consumer protection power altogether.
The result of a potential non-compete case may further redefine who faces FTC scrutiny, what business practices they use, and how the FTC accomplishes its rulemaking and enforcement priorities. Stay tuned for further developments.
[1] Dissenting Statement of Commissioner Christine S. Wilson Regarding the Notice of Proposed Rulemaking for the Non-Compete Clause Rule (Jan. 5, 2023) https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetewilsondissent.pdf (hereinafter, Wilson Non-Compete Dissent), at 1.
[2] Press Release, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023) https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
[3] Id. In conjunction with the ban, the FTC also announced actions against three companies concerning their non-compete business practices.
[4] Id.
[5] Id.
[6] Wilson Non-Compete Dissent at 1.
[7] 5 U.S.C. § 706(2)(A); see e.g., FCC v. Prometheus Radio Project, 592 U.S. ____ (2021) (FCC’s decision to repeal or modify three of its media ownership rules was not arbitrary or capricious for purposes of the APA).
[8] Wilson Non-Compete Dissent at 1–2.
[9] 15 U.S. Code § 45.
[10] Statement of the Commission on the Withdrawal of the Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act (July 9, 2021), https://www.ftc.gov/system/files/documents/public_statements/1591706/p210100commnstmtwithdrawalsec5enforcement.pdf.
[11] Dissenting Statement of Commissioner Christine S. Wilson Regarding the “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act” (Nov. 10, 2022) https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf.
[12] See e.g., Snap-On Tools Corp. v. Fed. Trade Comm’n, 321 F.2d 825, 837 (7th Cir. 1963).
[13] 142 S. Ct. 2587 (2022).
[14] Id. at 2605.
[15] Id. at 2616 Under Justice Gorsuch’s multifactor inquiry, agency action will trigger the application of the major questions doctrine if the agency claims, among other things, the power to (1) resolve a matter of great political significance, (2) regulate a significant portion of the American economy, or (3) intrude in an area that is the particular domain of state law. Id. at 2620–2622.
[16] A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).
[17] Wilson, Welfare Standards Underlying Antitrust Enforcement: What You Measure is What You Get (Feb. 15, 2019) https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf.
[18] Wilson Non-Compete Dissent at 2–3.
[19] Id.
[20] 21-86.
[21] 21-1239.
[22] 1:22-cv-03372 (N.D. Ill.).
[23] 141 S. Ct. 1341 (2021).
[24] Id.
[25] Wilson Non-Compete Dissent at 11.
[26] Id.
