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Under chair Lina Khan, the Federal Trade Commission has resuscitated its rulemaking power in its effort to shake antitrust enforcement back to life.
On Thursday, in a 3-1 vote, the Federal Trade Commission proposed rulemaking to ban restrictive contracts used by employers to block workers from taking jobs at competitor shops or starting their own businesses. The sweeping new rule will impact the approximately 1 in 5 workers who are currently under the thumb of noncompete clauses. After a 60-day public comment period to hear from workers, industry, and outside groups, the commission will make a final ruling.
Once implemented, the ban will fulfill a key directive that President Joe Biden tasked the agency to complete in his 2021 executive order on competition. Perhaps more important, the action revives the agency’s power under the Section 5 statute of the Federal Trade Commission Act. Section 5 permits the agency to use rulemaking to prohibit unfair methods of competition, rather than relying solely on case-by-case adjudication. This authority has essentially gone dormant for nearly half a century, and anti-monopoly reformers have urged its return to address a host of anti-competitive practices in industries like real estate, internet platforms, and pharmaceuticals.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC chair Lina M. Khan in a statement announcing the proposal. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Yet Khan and her fellow commissioners are well aware that the proposal will set off a legal fight with the conservative antitrust bar and the business lobby, not only to take down the rule but to stuff Section 5 rulemaking back in the bottle. The FTC has been preparing for this fight since the beginning of Khan’s tenure, though it will ultimately depend on the judiciary.
Often justified by businesses as a protection to guard trade secrets, noncompete agreements began initially as a term of contract for high-level executives, but have slowly trickled down across the economy. Since 2000, the use of noncompetes or other related clauses has tripled.
These contracts mean that a minimum-wage worker in the service or industrial sector can’t take a better-paying job without facing legal retaliation from their employer; a hair stylist fired from a salon isn’t allowed to take their practice to a nearby shop for over a year; patients can’t see their regular physician, because she’s barred from opening her own clinic within 35 miles or retaining any of her former patients.
In a related arrangement known as “no-poach agreements,” employers will horizontally collude with one another not to hire the other firm’s employees. The Department of Justice, the FTC, and state attorneys general have deemed no-poach agreements an illegal practice. In a landmark 2020 decision, Washington state Attorney General Bob Ferguson ended the restrictive practice nationwide for any franchise with at least three locations in the state, totaling 237 corporate chains.
As recent studies have shown, noncompetes give employers enormous leverage to suppress wages. These agreements also curb job mobility, since workers can’t use their professional skills to get higher-paid positions outside the firm or start their own businesses.
Noncompete agreements began initially as a term of contract for high-level executives, but have slowly trickled down across the economy.
As proposed, the rule would issue a blanket ban, without carve-outs for income levels or occupation. That decision was designed to avoid unnecessary administrative complications, similar to arguments against means testing for social programs.
President Biden, for his part, has been a long-standing critic of noncompetes. It was in many ways the issue that got Biden interested in a competition agenda. At a 2018 Brookings conference, he singled out the issue as a major contributor to wage stagnation. And he later made a ban of the clauses a linchpin of the 2021 competition order.
The proposed rulemaking comes on the heels of an enforcement action against a security guard company and two glass bottle manufacturers for their use of noncompetes. The key line in those complaints is that the clauses “constituted an unfair method of competition under Section 5 of the FTC Act.” That enforcement action was a prelude to using Section 5 rulemaking to ban noncompetes altogether.
Starting in the late 1970s, federal courts began undercutting the FTC’s statutory authorities, causing the agency to adopt narrower economic definitions of efficiency as evidence of anti-competitive harms. This legal turn pushed the FTC to rely heavily on lawsuits against individual firms rather than making rules that spanned across the economy. That retreat has led to a 40-year decline in antitrust enforcement. Lawsuits often take years and require costly expert analysis, while rulemaking can set bright lines for anti-competitive violations as intended by Section 5 of the agency’s original charter.
Under Khan, the FTC has resuscitated this power in its effort to shake antitrust enforcement back to life. In November, the FTC issued a policy statement on “unfair methods of competition” that marked this pivot in the agency’s focus and set the legal groundwork for the ban on noncompetes.
“Section 5 allows the FTC to make rules beyond the Sherman and Clayton antitrust acts to punish deceptive or unfair acts of competition, which is exactly what the agency did with noncompetes,” said Sandeep Vaheesan, legal director at the Open Markets Institute, who authored a petition in 2019 against noncompetes that was cited by the FTC commissioners in the proposed rulemaking.
Vaheesan sees noncompetes as an effective starting point for reclaiming Section 5, since it’s an issue with popular support and clear implications for both workers and fair competition.
The hope of antitrust reform advocates is that repeatedly invoking Section 5 will lay precedent and create a cascading effect for other ambitious policy goals. Among those reforms would be curtailing exclusive dealing arrangements, “pay-for-delay” deals where drug manufacturers buy off would-be generic competitors to keep them out of the market, or tech platforms self-preferencing their own content over third-party sellers.
Of course, that strategy hinges on the noncompete rulemaking getting through the courts, which isn’t a sure bet. Business groups will likely challenge the ban on grounds that the FTC doesn’t have authority to write competition rules. The Chamber of Commerce has declared the rule “blatantly unlawful,” as has Republican commissioner Christine Wilson, the lone no vote, in her statement opposing the proposed rule. Commissioner Wilson argues that the agency does not provide sufficient empirical evidence to support the ban and runs afoul of the “major questions doctrine.”
This beloved conservative legal doctrine holds that courts can overrule an agency if it oversteps congressional authorization. The Supreme Court’s recent decision undercutting the EPA in West Virginia v. EPA rested on this claim.
With its demonstrated hostility to the administrative state, the Supreme Court’s conservative justices might use a similar claim to strike down the noncompete rule. Yet, FTC officials and outside anti-monopoly groups maintain that the noncompete ruling falls squarely within the agency’s authority.
“The FTC’s powers have been upheld again and again by past Supreme Courts so there’s clear precedent here,” said Katherine Van Dyck, senior legal counsel at the American Economic Liberties Project. The unfair methods of competition policy statement uses a mountain of legislative history and case law to show that Congress meant for the FTC to go beyond the existing antitrust laws, which “substitute the court in the place of Congress,” according to the FTC Act’s chief sponsor. The entire point of the FTC was to create an enforcement agency on a broad range of anti-competitive conduct, with the authority to make rules.
One cause for concern is that the Supreme Court has already shown willingness to strip the FTC of long-standing authority. In AMG Capital v. FTC in 2021, the Court ruled that the agency couldn’t use statutes that it relied on for decades to acquire monetary relief from companies that violated competition law or harmed consumers. Effectively, the agency can now only obtain restitution from companies on a second documented offense after issuing a cease and desist order. For this reason, assuming the noncompete ban goes into effect and a firm decides to defy the law, it will be much more difficult to penalize the firm.
Despite the chance of the ban getting struck down in court, the FTC has opted to take a bold strategy that the agency lacked for decades.
“For far too long, legal risk has been cited as a reason for inaction and I’m glad to see the FTC shoot its shot,” said Vaheesan.
