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

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ICLE Director of Law & Economics Programs Gus Hurwitz joined Steptoe & Johnson LLP’s The Cyberlaw Podcast, offering two explanations for the Federal Aviation Administration recent system outage, which grounded planes across the country, as well as puzzling over the Federal Trade Commission’s peculiar determination to write regulations that will outlaw most non-compete clauses. The full podcast episode is embedded below.

Just before Christmas, the European Commission published a draft implementing regulation (DIR) of the Digital Markets Act (DMA), establishing procedural rules that, in the Commission’s own words, seek to bolster “legal certainty,” “due process,” and “effectiveness” under the DMA. The rights of defense laid down in the draft are, alas, anemic. In the long run, this will leave the Commission’s DMA-enforcement decisions open to challenge on procedural grounds before the Court of Justice of the European Union (CJEU).

Read the full piece here.

Abstract

The competitive market is informationally efficient; people only need to know prices to implement a competitive allocation. However, the standard formulation of competitive markets assumes that prices are not set by strategic agents but by “supply and demand” and thus neglects the underlying role of market microstructure. We show that if prices are determined by strategic agents, then intermediation is necessary for markets to achieve informational efficiency. We study two specific market microstructures: a model where trade is intermediated by market-makers and a model of random matching and bargaining. First, we show that an economy where competition among market-makers determines prices can approximate the informational efficiency of the competitive model. Second, we show that as the complexity of the economy increases, matching markets require infinitely more information than the competitive market.

Background: In 2015, the Federal Trade Commission (FTC) issued a policy statement on its “unfair methods of competition” (UMC) authority—the antitrust part of Section 5 of the FTC Act. According to the statement, while Section 5 wouldn’t be strictly limited to conduct illegal under the letter of the Sherman Antitrust Act, it would stick to the “spirit” of the Sherman Act, use roughly the same economic tools and general approach, and maintain the same focus on consumer welfare. 

But… Some argue for a more expansive interpretation of the FTC’s UMC authority, seeing Section 5 as allowing government enforcers to evade the judicial limits the Sherman Act places on private plaintiffs. This view, of course, still leaves open the question of what Section 5 should cover: If antitrust is supposed to protect competition without impeding markets and innovation, enforcement without any of the procedural and substantive guardrails developed over the course of 130 years of Sherman Act litigation is surely inappropriate.

A NEW POLICY STATEMENT 

Although a few saw the 2015 statement as too expansive, many condemned it as too constraining on enforcement. Those views found support in the new FTC majority appointed by President Joe Biden, which in 2021 moved by a strictly partisan vote  to withdraw the 2015 statement. The FTC issued a completely new Section 5 UMC policy statement in November 2022.

OLD STANDARDS & METHODS ARE OUT

The 2022 UMC policy statement omits both the consumer welfare standard and the rule of reason, which have been used to weigh how alleged violations harm and benefit competition and consumers. Under the new statement, conduct deemed problematic by the FTC can no longer be justified by efficiency or by a numerical cost-benefit analysis. It’s not clear that it can be justified at all. The actual and likely effects of conduct are no longer critical either.

The Commission says it will look at the “tendency” of a type of action to have an effect on not just consumers but also workers or “other market participants.” The new statement expresses concern with market conduct that is “exploitative” or “coercive.” Those terms sound bad, to be sure, but they don’t have any established meaning in antitrust law. The new statement reflects the Commission’s belief that it’s simply up to them to decide what constitutes a UMC violation.

REGULATIONS RATHER THAN CASE BY CASE

The 2022 UMC policy statement also signaled that the FTC would issue rules in accordance with its new interpretation of Section 5, potentially removing certain conduct from traditional rule-of-reason judicial review. Indeed, in January 2023, the FTC issued a notice of proposed rulemaking on noncompete clauses. The proposed rule claims the FTC’s UMC authority as its basis, and eschews a case-by-case approach to assessing the competitive effects of noncompete clauses for, instead, a blanket, per se ban on all such clauses in workplace contracts.

SEVERAL PROBLEMS REMAIN

When the FTC was established in 1914, some in Congress wanted the prohibition on “unfair” competition to reach further than the Sherman Act did at the time. But Congress didn’t specify the details, and today’s Sherman Act reflects a century of antitrust developments since then. 

Whatever “unfair competition” was intended to mean, it’s unlikely it was intended to operate in a realm entirely divorced from the economic understandings and law developed under the Sherman Act. 

In its selective reading of the legislative history, the Commission ignores the checks imposed by Congress and the courts when the FTC last tried a highly expansive “reading” of Section 5. In the 1970s, Congress thought the FTC was running amok, and it imposed new legal restrictions on the agency’s ability to issue regulations. For a brief time, Congress shut the FTC down. In a number of decisions, courts said that the FTC had failed to make a standalone case. 

CONSTITUTIONAL LIMITS ON AGENCIES

Under the U.S. Constitution, Congress makes the laws. Executive agencies interpret them and carry them out. The “major questions doctrine,” which has gained renewed import with the Court’s 2022 West Virginia v. EPA decision,  says there are limits on an agency’s ability to make law under the guise of interpretation. An agency can issue sweeping regulations with major economic import only if Congress has been specific in telling it what to regulate and how to do it. 

But “unfair” is not at all specific. And, in fact, the current FTC majority has made clear that it is interested in regulating all sorts of significant things for which it has no specific remit under Section 5, including employment agreements and data privacy. 

What’s more, the “nondelegation doctrine” says that Congress cannot be too sweeping in telling an agency what to do, because it cannot delegate its constitutional lawmaking duty to unelected agencies. The wording of the FTC’s new policy statement suggests that it remains very interested in promulgating such “legislative” rules, as the noncompete rule bears out. 

We don’t know for certain how the courts will view the FTC’s innovations, but there’s ample reason to expect considerable judicial skepticism.

For more on the limits of the FTC’s UMC authority, see the ICLE explainer FTC UMC Authority: Uncertain Scope.

Background: U.S. law grants both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ) authority to enforce both the Sherman Antitrust Act and the Clayton Antitrust Act. The FTC also enforces the Federal Trade Commission Act. Indeed, the agency’s antitrust authority is grounded in Section 5 of that act, which prohibits “unfair methods of competition” (UMC).

But… There’s been ongoing controversy about the meaning of these laws and particularly about Section 5. Both the Sherman Act and the FTC Act are written in very broad terms. Section 1 of the Sherman Act prohibits “Every contract, combination… or conspiracy, in restraint of trade.” But which contracts or combinations are illegal restraints of trade? Similarly, which methods of competition are “unfair,” as prohibited under Section 5? Most importantly, what, if anything, does UMC cover that isn’t covered by the Sherman Act?

A PURPOSEFUL LACK OF SPECIFICS 

In writing these antitrust statutes, Congress set down general goals, an institutional structure, and enforcement powers, but left it to the agencies and the courts to develop the details. That provided for flexibility as the economy and our understanding of market competition evolved.

For more than 100 years, that’s roughly how things proceeded. Both agencies brought cases; the FTC also generated research and reports; and the courts weighed in, too. Congress exercised its voice through both amendments and appropriations. The FTC monitored and contributed to economic learning in ways ultimately reflected in legal standards.

An understanding emerged that the FTC’s UMC authority reached somewhat beyond the Sherman Act, but was still tethered to the central antitrust concepts of the consumer welfare standard and the “rule of reason,” both of which offer courts a means to evaluate the legality of market behavior in terms of its likely harms and benefits.

WHAT ELSE, IF ANYTHING, DOES UMC COVER?

While the various antitrust laws use somewhat different language, there is considerable overlap among them. In 1941, the Supreme Court ruled (and has affirmed many times since) that UMC includes conduct prohibited under the Sherman and Clayton Acts. But UMC also includes some amount of “extra” coverage beyond the other antitrust laws—known as “standalone Section 5 authority.” While there’s been considerable agreement that Section 5 goes beyond the letter of the Sherman Act, there’s much less agreement about what lies beyond.

For one thing, the FTC Act doesn’t say. Also, relatively few decisions are based on standalone Section 5. The FTC has tended to bring cases alleging simultaneous violations of both Section 5 and the Sherman Act, and the DOJ doesn’t enforce the FTC Act. The relevant court decisions are old and likely out of date. Complicating the issue is that many of the cases recognizing standalone authority are ones the government lost, so the decisions suggest that Section 5 reaches something beyond the Sherman Act, but fail to indicate what that might be.

KEY CONSTRAINTS IMPOSED BY CONGRESS AND THE COURTS

In 1972’s FTC v. Sperry & Hutchinson, the U.S. Supreme Court famously found that there may be Section 5 violations that have “anticompetitive impact” but do not violate the other antitrust laws. But the FTC lost that case because the agency did not appeal the lower court’s decision that there was no Sherman Act violation and because it failed to establish a Section 5 violation on any other grounds. The Court’s ruling didn’t tell us what would constitute a standalone violation of Section 5, except that consideration of “public values beyond… those enshrined… in the… antitrust laws” was permitted.

Yet in the wake of Sperry & Hutchinson, as well as a dust-up between the FTC and Congress over Section 5’s prohibition of “unfair or deceptive acts or practices” (UDAP), Congress amended Section 5 to make clear that “public policy considerations may not serve as a primary basis” for liability (at least for UDAP).

More recent decisions have reinforced the importance of an integrated approach to the antitrust laws, as well as of both the rule of reason and the consumer welfare standard. This prompted former FTC Chairman Bill Kovacic to write that the FTC “should not… rely on the assertion… that the Commission could use its UMC authority to reach practices outside both the letter and spirit of the antitrust laws. We think the early history is now problematic, and we view the relevant language… with skepticism.”

A GENERAL CONSENSUS

Most experts recognize that Section 5 operates as a measured extension of the Sherman Act, with the two laws serving a common goal. Thus there is agreement that Section 5 applies to “invitations to collude.” If two or more competing firms agree to fix prices, that’s an illegal agreement that violates the Sherman Act. But if one firm attempts unsuccessfully to collude—inviting a competitor to join in a price fixing scheme only to be rebuffed—there’s no agreement at all, much less an actual restraint. But because it’s an attempt to violate the Sherman Act that presents a risk of harm to competition and consumers but serves no legitimate business purpose, most everyone agrees it would properly be within the scope of Section 5.

For more on ongoing controversies regarding Section 5 UMC, see the ICLE explainer FTC UMC Authority: Enforcement Issues.

The U.S. economy has a new labor regulator. Under a just-unveiled proposed rule, the Federal Trade Commission would ban the use of noncompete terms in employment agreements nationwide.

Read the full piece here.

It is widely assumed that platform technology markets are inherently prone to monopoly outcomes in which a single firm or a handful of firms enjoy market power due to network effects and switching costs.  This assumption supports dramatic changes, both proposed and enacted, to the application of competition and antitrust law in platform markets.  Remarkably, this assumption rests on weak empirical support.  The history of technology markets shows that incumbent platforms have been repeatedly challenged successfully by innovative entrants.  Consistent with this pattern, a close examination of the cloud computing market finds little evidence to support assertions of platform entrenchment or user lock-in that would justify intervention by competition regulators.

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

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