Feb 02, 2023
On January 27, The Capitol Forum hosted a conference call with Sandeep Vaheesan of Open Markets Institute to provide history and context to how the FTC’s proposal to ban non-compete agreements came to the forefront of labor policy and its implications if passed. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good morning, everyone. And thanks for joining today’s Conference Call with Sandeep Vaheesan, Legal Director at the Open Markets Institute, on the FTC’s Proposed Rule to Ban NonCompete Agreements. Sandeep leads Open Markets’ Legal Advocacy and Research Work, including its Amicus program. He works on a range of anti-monopoly topics, including antitrust laws’ role in structuring labor markets and promoting fair competition. As always, we’ll save some time for audience questions during the second half of the call. If you have questions, please email them to editorial@thecapitolforum.com. And Sandeep, thank you so much for doing this.
SANDEEP VAHEESAN: Thanks for having me. My pleasure to be here.
TEDDY DOWNEY: I want to do a quick I always do this with you because The Capitol Forum’s been around for ten years. But you were the first you did our first conference call and our first event. I think it was on an airline merger. I don’t even remember which one it was so long ago, while you were at AAI. So I always like to remind people that Sandeep was one of the earliest Capitol Forum enthusiasts I think. So I can’t thank you enough for sticking with us over the past ten years.
SANDEEP VAHEESAN: Absolutely. You and your colleagues do great work. And I’ve learned a lot from the reports you put out. I will correct you though. The event was on beer, not airlines.
TEDDY DOWNEY: Oh, it was on beer. Oh, my God. Oh, my God. I can’t believe I got that wrong. Oh, so was it AB InBev bought Grupo Modelo.
SANDEEP VAHEESAN: Exactly. Yeah, that was one of the big mergers happening at the time.
TEDDY DOWNEY: Wow.
SANDEEP VAHEESAN: Wow.
SANDEEP VAHEESAN: I wrote a report for AAI about the merger and why it should be stopped. And I talked with you and your colleagues about that.
TEDDY DOWNEY: Yeah, that was what kicked off the company. So a little bit of history there for everyone. And with that, I’d love for you to walk us through all the work you’ve done over the years advocating for this rulemaking and the research that you’ve done and the reports that you’ve done. Because I don’t want to miss out on that. I think everyone should have that perspective to kick things off here.
SANDEEP VAHEESAN: Sure, this has been on my radar and my colleagues’ radar since 2018. There was a great deal of reporting on non-compete clauses at the time of how employers were using them with workers up and down the income scale. They weren’t being used just with CEOs and other high earners. And we were very interested in what the FTC could do in labor markets. I’ve done a lot of research on the FTC’s unfair methods of competition power and realized that this is a really important statutory authority that the FTC had been sitting on for decades. It’s done nothing with it since the 1970s.
And building on research I’ve done, the excellent research of people like Evan Star, Open Markets, along with a number of other public interest and labor groups, such as the AFL-CIO, SEIU, Public Citizen and the Institute For Local SelfReliance, we petitioned the FTC in March of 2019 to do an unfair methods of competition rule banning noncompete for everyone, no exceptions.
And we didn’t file this petition with an expectation that the Trump administration would act on it. We were skeptical that they’d take any action. Instead, we viewed this as a way to shape the antitrust agenda for the next Democratic administration. So our public facing work began almost four years ago. And since then, we’ve been writing letters, opeds, and blog posts urging the FTC to act.
And the Trump administration – and the FTC under Joe Simons to their credit, did a few things that we didn’t expect. They held a public workshop on noncompete in early 2020 and invited public comment on non-competes. Hundreds of workers submitted comments to the FTC describing how non-competes have hurt them, derailed their careers, forced them to stay in abusive, discriminatory environments.
The Simons FTC collected some important evidence and started the process of building the evidentiary record for this rule. At the same time, they signaled pretty clearly that they weren’t going to do a rule. They were merely interested in studying the problem.
And we just kept banging the drum and saying the FTC needs to act. The President needs to appoint the right people who want to use the FTC’s message of competition power, including against non-competes. And non-competes have been an area of great interest to the President for years. When he was Vice President in 2016, he spoke out about the injustice of non-compete clauses and he’s talked about them with regularity since then.
And we were very excited when President Biden, in the July 2021 Executive Order on promoting competition in the American economy, encouraged the FTC to do a rulemaking on non-compete clauses.
I thought this proposal would come somewhat sooner, given the people the President appointed to the FTC, given the President’s personal interest in this topic, and given the work that had been done before he even took office in January, 2021. But still we’re very delighted to see the strong proposal that came out earlier this month that did what we asked the FTC to do almost four years ago – a blanket ban on non-compete clauses, no exceptions based on income or occupation.
TEDDY DOWNEY: And why do you think it’s important to ban them all rather than just for low income earners, which I think a lot of people are trying to get the FTC to narrow the rule that way?
SANDEEP VAHEESAN: That’s right. A number of people, mainly centrist and other more conservative academics and commentators, have said the FTC should do something more targeted, focus maybe only on low wage workers. The evidence, though, certainly supports a complete ban. These contracts hurt low wage workers. But they also hurt the wages and wage growth of middle and even higher earning workers.
There’s actually a study from the early 2010s that found that non-competes hurt even corporate executives. They typically negotiate their employment contracts and hire lawyers to review the details. Even these people at the very top of the income distribution are hurt by non-compete clauses.
And so those are just some of the quantifiable effects. If you look more broadly, non-compete for workers prevent people from leaving for greener employment pastures, starting their own businesses and escaping toxic work environments.
The wage effects are important, but they’re certainly not the only harms from non-compete clauses. And I’d add that the harms from non-compete don’t arise solely or even mainly from employers taking their workers to court and getting injunctions preventing them from starting a new job or establishing their own business. The mere existence of non-compete clauses has a chilling effect. People generally believe if they have a non-compete, that it’s enforceable. That’s understandable: People don’t want to be dragged into court. They don’t want to be sued. And so employers exploit our reasonable desire to just follow the rules and avoid getting in trouble with the law. Even in California, where non-competes have been unenforceable for the past 150 years, a significant fraction of workers have non-competes. The harms from non-compete, and their mere existence, is very real and has been documented through empirical research over the past ten years.
And further and we can talk more about this — non-competes don’t have any legitimate justifications. Employers have less restrictive, more targeted alternatives for protecting trade secrets and other proprietary business information. And most importantly, if employers want to retain workers, they can simply pay them fair wages, treat them well, and offer regular raises promotions. They have a number of other alternatives and don’t need noncompetes.
TEDDY DOWNEY: Yeah, let’s just stick with that. Because if you are a company and you’re you look at this and you’re like, well, I actually don’t want to be engaging in unfair methods of competition or something the FTC thinks is unfair, but I still want to protect sensitive information or otherwise put some restrictions on employees in other ways are not unfair or that aren’t prohibited, what are the options available to them?
SANDEEP VAHEESAN: When it comes to protecting information, they have several tools at their disposal. For trade secrets, we actually have a specialized body of law called trade secret law that prohibits the unauthorized disclosure of confidential information. And trade secret law carries serious penalties. People have gone to prison for disclosing trade secrets. Employers have that very powerful tool in their pocket.
Apart from that statutory tool, they have contractual tools. Let’s make this concrete and talk about a hypothetical example. Let’s say you have a medical practice with twenty doctors. One of the doctors wants to leave and start her own practice in the same community. The medical practice employing her may have invested a significant amount of money in building its base of patients. They understandably don’t want this doctor to strike out on her own and take all the patients with her.
In a situation like that, the medical practice can use something called a non-solicitation agreement with all its doctors. And under a nonsolicitation agreement, a person, once they leave, cannot actively recruit patients or other customers from their former employer for a set period. Non-solicitations can be used to protect patient lists and the associated investment that an employer undertook.
Those are two methods—one statutory and one contractual—that employers have that are more targeted and less restrictive than non-compete clauses.
Further, employers should use carrots instead of sticks to retain staff. I get why employers like non-compete clauses. They restrict worker mobility. They don’t have to pay their workers fairly. They don’t have to offer raises and bonuses to keep them. But that’s not how we want labor markets to work. We want labor markets where employers constantly feel pressure to retain workers. We want them to feel a little bit scared. We’ve seen that in a number of sectors over the past two years, notably in fast food where employers are fearing worker departure for the first time in a long time. And what we’ve witnessed is higher wages and better benefits. We want that dynamic across the economy in all labor markets. And outlawing non-compete clauses is one way of doing that. Employers will feel more pressure to treat their workers well and offer good wages.
Indeed, they’ve already come out and said that if the FTC does ultimately ban non-compete clauses, that’s what they’re going to do. There was a nice piece in “The Wall Street Journal” last week where lawyers and consultants for employers effectively said, “yeah, we might just have to start paying workers better and offering them promotions if noncompetes go away.” They’re publicly acknowledging that they have other methods.
TEDDY DOWNEY: Yeah, I get the sense that also, to the extent that people have real concerns about trade secrets and things like that and I think this is mentioned the same article that the companies will move toward those types of options also. That they were sort of using non-competes as sort of a blanket way to address everything, that they can just be more targeted in how they write up their contracts. So yeah, it does seem to already be having an impact.
SANDEEP VAHEESAN: Exactly. And I would add one other point. When it comes to protecting proprietary information, non-competes aren’t actually a great tool. I highly recommend an article by Law Professor Viva Moffat on this topic. It’s called “The Wrong Tool for the Job”. And she describes why non-competes are a poor fit for protecting business information.
In a nutshell, non-competes restrain a worker from leaving, finding another job in the same industry or the same line of work, or starting a business in the same industry. And we kind of see the mismatch between what a noncompete does and what the ostensible purpose is.
It broadly restrains worker mobility in the name of protecting some discrete piece of information. So facially, it seems overbroad. It doesn’t actually target what it’s trying to protect, which is trade secrets or other valuable intangibles.
Yet, at the same time, a non-compete doesn’t restrict the unauthorized disclosure of information. Let’s say a person is unhappy with their boss and wants to stick it to them–one way of sticking it to them is leaking a trade secret to a rival. A non-compete does nothing to prevent that. And so long as this illicit disclosure is not traced to its source, the person could get away with it despite having a non-compete.
On the one hand, non-compete is overbroad, restricting labor market mobility. On the other hand, it doesn’t actually stop what it’s supposed to stop.
TEDDY DOWNEY: Yeah, it makes sense. I mean, to the extent that companies are writing contracts that address the actual issue that they want to address makes more sense than kind of using this sort of blanket non-compete, these kind of broader non-competes. And we’ve gotten a lot of questions about the sort of tactics or strategies that would effectively amount to a non-compete. I was wondering if you could talk about that and if there’s any way that this rule could be even further strengthened or clarified or improved around those edges, sort of in terms of like, well, it’s not a compete, but it’s basically doing the same type of thing.
SANDEEP VAHEESAN: Yeah. So we’ve already started to see employers move away from traditional noncompetes. A number of states have restricted the use of non-competes. Bills have been introduced in Congress to prohibit non-competes. Now, the FTC has proposed a blanket ban. Employers are trying to develop functional equivalents of non-compete clauses, and I’ll highlight two.
The first is something called a Training Repayment Agreement Provision or TRAP. And my friends at the Student Borrower Protection Center have done yeoman’s work in exposing and publicizing the evils of these contracts. Under these contracts, what an employer says is we offer our workers trainings. In fact, we mandate them to attend and participate in certain trainings. If they leave within a certain period of time let’s say they leave within two years of joining they have to compensate us for the training that we’ve provided them. And in TRAPs that I’ve seen, the dollar figure has been as high as $50,000 or $75,000, which is a significant sum of money. And what these contracts do is they function as a de facto non-compete. They discourage people from leaving. And they’ve even been broader than non-competes. Non-competes restrict a person’s ability to work in the same industry or work in the same occupation. What a TRAP does is deter all types of departures.
Let’s say someone wants to leave to take care of a sick parent. Under a TRAP, they would have to compensate their employer even though they’re leaving not for a rival or another firm in the same industry, but to stop working and to tend to their parent. TRAPs are even broader than traditional non-competes. And they’re disturbingly similar to involuntary servitude whereby people are actually forced to stay in place and work for their current employer. So that’s one.
The second is something similar. It’s called a liquidated damages clause in which a person is being told that if they leave, they have to pay their employer a stipulated amount. The amount isn’t necessarily tied to training. It’s rather the employer’s estimate of how much economic harm they sustain when a worker leaves. And the rule proposed rule I should say covers these contracts, but I think it could be clarified and strengthened. I think the final rule should establish a blanket ban on these contracts. The proposal, however, only prohibits them if the dollar figure that the employer has included is unreasonable. And that unreasonable provision could be a source of a great deal of mischief.
And as I mentioned earlier, employers don’t use these contracts, at least with most workers, with an eye of going to court to enforce them. They recognize that they have significant deterrent value just on their very own. And I worry anything short of a blanket ban on non-compete and functionally similar contracts like TRAPs will encourage employers to keep using them.
TEDDY DOWNEY: But does there have to be something at least open ended a little bit? Because you’ve identified TRAPs and you’ve identified these liquidated damages clauses. But for the people who really love their non-competes, they’re going to come out with a third and fourth and a fifth novel contract clause, I would imagine. Do you still have to leave something open ended as sort of like if it effectively works like a noncompete?
SANDEEP VAHEESAN: I think that’s right. The rule has to be drafted expansively to cover contracts that are functionally like non-competes, not just contracts that are identical to a non-compete. And I think the rule does that in significant measure. Employers and their counsel are very creative and imaginative. If X is prohibited, they’ll figure out something that is functionally identical to X. And yeah, the FTC needs to draft a broad rule that will allow it to go after the new non-compete 2.0 or non-compete 3.0.
But I think this will be an ongoing process. The rule will not be the FTC’s last word on non-competes. The FTC will also have to obviously enforce the rule against firms that refuse to comply. But then also offer guidance to industry, saying that just because something doesn’t have the word non-compete in bold letters at the top doesn’t mean that it’s okay. And future enforcement action and guidance will be important to ensure that the rule, and the spirit of the rule, are effective.
TEDDY DOWNEY: Yeah. Anything else about the rule that you think is interesting or important or should be changed or anything that stands out to you? I know that something that jumped out to me was that the employers are required to notify the employees that their non-competes are illegal. Or they have to have that notification. It seems important. Anything like that that sort of strikes you as important to discuss?
SANDEEP VAHEESAN: The notification piece is really important. The rule make existing noncompetes null and void and employers have to tell their employees that they are null and void and can no longer be enforced. That is a really strong, positive piece of the proposed rule.
I think one area where the rule could be strengthened is the intersection between noncompetes and no poach agreements. These contracts are often mentioned in the same breath, but they have some differences. A noncompete is a contract between an employer and an employee. A no poach is a contract or agreement between two employers or two firms. These are arrangements that an employee may never be aware of. And under current antitrust precedent, no poach, no hire, other forms of collusion among rival employers is per se illegal. And the DOJ has been enforcing this prohibition through criminal actions. The law on horizontal no poach, no hire is pretty clear. This conduct is illegal and subject to criminal prosecution.
There is a bit of ambiguity around so-called vertical no poach and no hire agreements. These are contracts that have commonly been seen in fast food franchise contracts in which McDonald’s and Burger King will tell their franchisees, you shall not hire workers from another McDonald’s or Burger King or someone who’s worked recently at a McDonald’s or Burger King. And these contracts have been litigated. They’ve largely disappeared thanks to the enforcement work of Washington State AG Bob Ferguson, but they still show up outside of fast food in, for example, staffing contracts. These have been a mainstay of third-party staffing arrangements for years.
The FTC rule should cover these vertical no poach agreements. Because there’s some disagreement right now whether these contracts are per se illegal or subject to the rule of reason under the Sherman Act. I think it should be per se illegal under Sherman. But that’s a question that will take years to litigate, and I’m not confident the courts will get it right. I think that the FTC should just ban them through this rulemaking.
TEDDY DOWNEY: Have you looked at the comments? Because this comes up in the comments. I mean, the comments are just so heavily weighted towards health care. And I think we’ve seen this type of thing in health care as well. I’m curious to get your thoughts on if you read the comments. I mean, you’ve obviously read a lot about public comments around this. But what’s your take on I mean, have you read the comments? I was just curious if you’d read them yet.
SANDEEP VAHEESAN: I have not had a chance to read the comments, but I’ve seen excerpts shared on Twitter. And the comments thus far are overwhelmingly supportive of the rule. I believe Axios had a story last week which said that out of the thousands of comments filed so far, only one was against the rule, which is pretty incredible. And the outpouring of support is very encouraging. I am confident this proposal is going to attract hundreds of thousands of comments, maybe even over a million comments. But the fact that we were already at six or seven thousand and it’s only been three weeks is a very encouraging sign. And you’re right. From what I’ve seen, doctors and other medical professionals have been very engaged and supportive of the rule, sharing their experiences with non-competes.
Many people don’t know this, but a significant fraction of doctors today aren’t owners a practice, either individually or in partnership with other doctors. They’re employees of a group practice or hospital. And a significant fraction of them have noncompetes. And they’ve been vocal that noncompetes not only hurt their careers, but they can hurt their relationships with patients. If I have a long-standing relationship with my doctor and they choose to leave and can’t resume practicing in the community where I live because of the non-compete, that hurts me. And this is something that is happening on a large scale across the country. Prohibiting noncompetes in the medical profession is not only about worker justice, but also about protecting patients. And I think doctors can provide important support for the rule describing their experiences of noncompetes, describing how their patients were hurt.
I think also explaining how non-competes aren’t just harmful to low wage workers. Because doctors are typically high earners. They’re privileged professionals. And in spite of all that, they’re hurt by non-competes. They typically don’t negotiate their non-compete. They worry about violating a non-compete and facing lawsuits. Doctors can help shore up the case for a blanket ban, instead of something more targeted.
TEDDY DOWNEY: Yeah, especially on something specific like these nopoach, no hire agreements in vertical situations. A couple of other things that came out of the comments. One, I was really surprised how many people consider their own non-compete to basically indentured servitude.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: I was very surprised by that. I mean, I get it. But I didn’t think that people would feel that way. It also seems counterintuitive. Like these companies want people to work – these people don’t want to work there.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: You’re keeping people that don’t want to work there, work there. I don’t know. That seems very bizarre. But yeah, that really jumped out at me. And the other thing about the comments was a lot of them are also like hospitals. And some of those are going to be for profit and covered. I couldn’t tell. They don’t say, hey, we’re not covered because we’re a nonprofit. But I am curious to get your thoughts on all the industries that have regulators that are not covered by this rule and whether or not you think I saw in the American Prospect proposals that, hey, you need other agencies like the Department of Transportation to implement something similar so that you can actually affect all employees across the economy. What’s your take on that?
SANDEEP VAHEESAN: I’ll start with the nonprofit exemption, and this has been a hotly debated issue for years. And it’s a question of whether the FTC Act nonprofit institutions. The FTC Act covers persons, partnerships or corporations. And corporation, if I recall correctly, is defined in a way that excludes nonprofits. That means nonprofits aren’t a covered corporation, but they certainly are a person. So I think the FTC would have quite a strong argument that nonprofit institutions in health care and elsewhere would be covered by the rule. Putting that aside, you’re right. The FTC has jurisdiction over most of the economy, but not quite all of it. And there are some important exceptions.
I have the text of the FTC Act in front of me. The FTC doesn’t have jurisdiction over banks, savings and loan institutions and Federal Credit Unions. Then it also doesn’t have jurisdiction over common carriers, air carriers and foreign air carriers, and then also persons, partnerships and corporations subject to the Packers and Stockyards Act. So basically, banks, airlines and meatpackers fall outside of the FTC Act. We would need other agencies such as DOT, bank regulators and the U.S. Department of Agriculture to enact analogous rules to ensure that everyone in the workforce is covered.
TEDDY DOWNEY: And does Open Markets have any plans to advocate for that?
SANDEEP VAHEESAN: Yeah, we’ve been thinking about it, and I suspect we will write something calling on these agencies to follow the FTC’s rule and do something similar. DOT, for example, has Unfair Methods of Competition authority. If they choose, they can copy and paste the FTC’s rule and make sure that it applies to airline workers as well.
TEDDY DOWNEY: Yeah. I just want to remind the audience, if you have questions, please email them to editorial@thecapitolforum.com. We’ve got one here. What’s your view of the legal outlook for this rule and also for Section 5 rulemaking more generally?
SANDEEP VAHEESAN: I am probably more optimistic and confident than many people, but I’m very aware of the legal risks. I think there are at least two important legal risks facing this rule. The first is does the FTC actually have the authority to write competition rules? It clearly has the authority to write consumer protection rules under the Magnuson Moss Act. A number of people, including people who I think of as sympathetic to progressive antimonopoly policy, have said the FTC does not have the authority to write competition rules. I don’t find that argument persuasive just because the plain text of Section 6(g) of the act says otherwise. 6(g) is titled classification of corporations regulations. And it says from time-to-time, FTC can classify corporations and, except as provided in the Magnuson Moss Act, make rules and regulations for the purpose of carrying out the provisions of the subchapter. Subchapter refers to the entire FTC Act.
If I’m a textualist, that provision which I read answers the question pretty unambiguously–the FTC can write competition rules. I don’t see any wiggle room. The text doesn’t say procedural rules and regulations. It just says rules or regulations for the purpose of carrying out the provisions of the subchapter. I think that the FTC is on fairly strong textualist grounds to do this rule as a UMC rule.
That said, we’ve seen over the past few years that judges do what they want. If they find something ideologically objectionable, they’ll find grounds to strike it down. And there’s a great deal of hostility toward progressive administrative action in the courts right now. We should have no illusions about that.
A second and bigger challenge is something called the Major Questions Doctrines that was announced quite recently by the Supreme Court in the decision West Virginia versus the EPA. And this is the idea that if an agency tries to regulate a so-called major question—the court offered some principles on what constitutes a major question, but it’s a rather subjective inquiry, it can only do so if Congress clearly gave it the authority. There has to be something in the underlying statute that says the agency can regulate the following practice.
And I think the Major Questions Doctrine is probably the biggest threat to the FTC rulemaking on noncompetes. But even there, I think that the FTC has some pretty good arguments, and I’ll offer two. The first is noncompetes are a type of vertical restraints. These are contracts between someone in a buyer/seller relationship. And vertical restraints have been the focus of antitrust law and FTC enforcement action for decades. Some of the earliest antitrust cases in the United States involved challenging vertical restraints used by large corporations. The Standard Oil litigation was partly about vertical restraints between Standard Oil and railroads. I think non-competes are just another vertical restraint and therefore in the wheelhouse of the FTC’s work.
The second is noncompetes specifically have been the stuff of antitrust law for a long time. To be sure, the FTC and DOJ haven’t really done much on noncompetes in recent times. But if you look at the early history of the Sherman Act, if you look at the common law on restraints of trade, restraints of trade typically referred to practices that prevented someone from working in a particular occupation. History that supports the idea that the FTC isn’t really doing anything novel or unprecedented here. It’s actually doing something that’s been at the core of antitrust law and policy for more than 100 years.
To summarize, I think the two big questions, among others, will be does the FTC have the authority to write competition rules? And second is the FTC regulating a major question that Congress didn’t authorize it to regulate? As I said, judges will do what they want to do. But the FTC is on fairly strong legal grounds if and when this rule is challenged.
TEDDY DOWNEY: Yeah, some major questions. It’s got a lot of tension with Chevron in some ways.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: It’s like be very specific and evidenceoriented and clear and don’t come up with arbitrary exemptions and stuff like that. That’s Chevron. And then the other one is like if it’s too broad and too out there, then we’re going to whack it for being too much of a question, too broad of an authority. So it is an interesting dynamic the Supreme Court has created for these agencies. What about major questions? Do they have to worry about major questions on the – does it only apply to the rule? Or can they apply major questions to the FTC using their unfair methods rulemaking authority? Like from the broader point.
SANDEEP VAHEESAN: So a rule targeting another practice? Or maybe a broader use of the UMC power?
TEDDY DOWNEY: Yeah, that was another thing. I mean, it’s just kind of like how would they apply it? Anyway, I’ve just been curious about it. I mean, it’s hard because, to your point, it’s a very vague and seemingly arbitrary standard.
SANDEEP VAHEESAN: Right.
SANDEEP VAHEESAN: It’s only extraordinary circumstances and only when the authority’s not clear. Well, the authority, at least you’re arguing, is clear. But it’s powerful, right? It’s a broad power that the FTC has. So if you ideologically want to whacked down — take a chunk out of an agency’s broad authority, I don’t know. I was curious what you —
SANDEEP VAHEESAN: I’ll quickly mention the non-delegation principle as well. The constitution says that Congress shall not delegate legislative powers to other branches of the government or other parties. And a couple of conservative justices wanted to revive nondelegation, which has been dead since the New Deal. Although, I think with the adoption of major question, I think nondelegation will recede a little bit. For conservative judges, major questions, may be a more open-ended and therefore powerful tool.
I’ll note that Congress has been delegating policymaking functions to agencies since the founding. This is not something that started with the New Deal or the Progressive era under Woodrow Wilson. There’s been a lot of good writing in the past few years describing the delegations that happened in the 18th and 19th centuries. The idea that delegating policymaking authority to agencies is a 20th century creation is just false.
But nonetheless, despite what the historical record says, so much of conservative jurisprudence is informed by bad history. So non-delegation is another that we need to be aware of. The broader UMC power question, yeah, it’s hard to say how broadly major questions sweeps. Does it cover only rulemaking? Or does it also cover significant adjudications? Does it cover even policy statements that affect a great deal of economic activity? We don’t know yet. I think we will get a better sense in the coming months and years, especially with how the lower courts are interpreting and applying major questions.
TEDDY DOWNEY: There’s been this conservative argument from some conservatives that, look, when Congress came up with Section 5, antitrust law was much narrower. And yes, it does expand authority beyond what antitrust law was before. But since then, antitrust law has become much broader in terms of an authority. And there’s no need for Section 5 as a legal argument. I just want to get your take on that. That’s the most prominent. I think that’s one of the more prominent arguments I’ve seen attacking FTC’s unfair methods of competition rulemaking authority.
SANDEEP VAHEESAN: It’s striking how similar things are today to when the FTC was created in 1914. So why did Congress create the FTC? It was partly in response to the Standard Oil decision in which the Supreme Court said going forward, only unreasonable restraints of trade will be illegal. And it is the responsibility of the courts to figure out what’s an unreasonable restraint of trade.
The Supreme Court engaged in a power grab in Standard Oil. And Justice Harlan in his dissent called them out for doing that and said, this is an example of judicial legislation. The decision provoked outrage in Congress and among members of the public. And Congress passed the FTC Act to effectively reclaim power from the courts and set up this agency to be the national policymaker on competition. And the agency would do that through adjudication, through rulemaking, through guidance, and through oversight of industry.
And we’re in a very similar situation today where the Supreme Court has said Sherman Act is a common law statute. And it’s their duty to identify both the ends of the law as well as the doctrinal means. And we’re facing a need for Congress directly and indirectly through agencies to reclaim policymaking power. And so Section 5 is maybe more relevant than it’s been since 1914. The idea that somehow we can trust the courts to make good antitrust policy is just wrong. And just look at some of the recent decisions where the court, based on “economics”, is further weakening restrictions on monopolistic practices and other restraints and restraints of trade. I think Ohio versus American Express is a good example of that, where the court adopted this fanciful concept called two-sided markets to make rule of reason cases even more difficult for government and plaintiffs to win.
TEDDY DOWNEY: Yeah, I’ve looked at it a little bit differently just in the sense that the logic of the argument just doesn’t make sense to me because there’s an acknowledgment that Section 5 is broader. So think about it as a circle. Okay, this is a circle that goes around antitrust law, the Sherman Act. Okay. Well, even if it’s true that antitrust has broadened in terms of the body of law, even if that is true and that circle is expanding, the other circle would subsequently also expand if the definition of Section 5 is that it’s a broader authority. It would also get bigger. So I just don’t get — I’m at a loss personally just trying to evaluate it as a legal argument. But I couldn’t agree more when it comes to the major questions issue. I mean, that really does seem to be where the rubber meets the road on this one.
SANDEEP VAHEESAN: You’re absolutely right. The FTC Act was enacted to be broader than the Sherman and Clayton Acts. And the Supreme Court and the Courts of Appeals have repeatedly said that. And let’s assume Section 5 is a dumb law. It represents dumb policy. It’s still the law. That’s still the FTC’s mandate. And if these conservative critics of anti-monopoly think it’s bad, they should make their case to Congress. And I think this Commission and the Chair have been very good about emphasizing that they were charged with policing unfair methods of competition. That is their statutory duty. And for them to disregard that constitutes civil disobedience. And I think for too long the FTC has said we’re not going to use this power even though Congress gave it to us.
And in terms of the FTC, the breadth of Section 5 and Unfair Methods of Competition, I’ll give you a quote from a 1986 Supreme Court. This is well into the Chicago school era. It’s a decision called FTC versus Indiana Federation of Dentists. The court wrote, “The standard of unfairness under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws, but also practices that the Commission determines are against public policy for other reasons”.
Here is a decision from 1986, during the Reagan presidency, by which time the court had moved significantly to the right, saying that the act is broader and covers things that the FTC deems are against public policy. This was a unanimous decision too. There was no dissent from any of the conservative justices. And your circle, concentric circle, metaphor captured it perfectly. You have a circle encompassing the Sherman Act. Then you have a larger circle capturing the Clayton Act, and then you have an even broader circle that’s the FTC Act. And that’s the law as it is.
TEDDY DOWNEY: I spent months trying to figure out the details of arguments that sort of gave so many commentators conviction that this would not hold up in court. And I was just really underwhelmed when I saw the arguments. I mean, I get it.
SANDEEP VAHEESAN: You are not alone.
TEDDY DOWNEY: Major questions is interesting. That makes sense to me. But the other stuff I’ve just had a really hard time getting people to drill down on it with me. And it’s just one of those times when there was this real consensus and it was kind of fake. To be honest, it was kind of fake. It was just people hadn’t done very much work to go back and actually study it. And I sort of would have expected more. Just given that you had written a paper, Rohit and Lina wrote a paper. I mean, Chair Khan and FTC, former FTC Commissioner, now CFBP Director Chopra. Just given that there were papers about it and yeah, anyway.
SANDEEP VAHEESAN: Yeah, I’ve also been struck by the arguments critics have made thus far. I thought they’d be much more compelling. Instead, it’s turned out to be kind of the same old stuff, the standard theoretical arguments for non-compete clauses, and arguments against the FTC’s authority to write rules. What else? The idea that higher earning workers aren’t hurt by non-compete clauses. It almost seems as though some of the critics haven’t read the proposal. The proposal reviews the evidence, including evidence not supportive of the rule, at great length and explains why the Commission reached the conclusion – well, the tentative conclusion that it did.
And the proposal talks at great length about alternatives to non-compete clauses. I think some of the people attacking the rule should actually set aside a couple of hours, maybe half a day, and read the proposal and acknowledge that the FTC’s aware of the arguments against the rule, and the FTC’s aware of evidence maybe supporting a more targeted approach. In light of all that, it came to a reasonable and eminently defensible conclusion that a complete ban is the right approach.
TEDDY DOWNEY: I’d say the last thing that I find interesting about this, at least how it plays out in the courts in particular, is there are probably going to be less popular politically rules down the road.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: But, I mean, just looking at the initial comments, how overwhelmingly specific they are and how the various industries, how emotionally charged they are if you have sort of however many years this would take to get to the Supreme Court, are people expecting their non-compete to be banned and then they take it away? I mean, these are not dumb people. They’re not like completely detached from society.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: They may not want to use their major questions doctrine on this one. I mean, I’m curious to get your thoughts on that, just like how much the public comment period, how much that changes. I would say both individual is sort of the decision-making by judges and also even corporations when they have a choice, we could do this now or we could wait and see what happens with the Supreme Court. And they just look at the comments and they just say, well, this is probably worth doing anyway.
SANDEEP VAHEESAN: Two really important points in that question. The courts are political institutions. I think at this point, in 2023, it’s hard to deny that. They’re not constrained in the same way members of Congress are or the President is. They’re not worried about losing reelection. But they do care about public opinion. And there are areas where they’re willing to be bold and frankly audacious and other areas where they realize maybe restraint is the right approach.
If you look at the Lochner era from 100 years ago, the Supreme Court was striking down a lot of progressive legislation. But it wasn’t striking down everything. There were good laws that survived judicial challenge then. And I think that experience should counsel some optimism that agencies and Congress will be able to do things and survive judicial challenge because they’re doing what’s popular. And the court doesn’t want to go out on a limb on everything. And there is broad ideological support for a ban on noncompetes. This is not an issue just for progressives or self-identified Democrats.
And if you look at Congress, the Workforce Mobility Act that was reintroduced last term, had bipartisan support. The main sponsors were Chris Murphy, a Democrat from Connecticut, and Todd Young, a conservative Republican from Indiana. And this is an issue where there’s broad bipartisan and transideological opposition against non-competes. And for a court to strike this down would be doing something immensely unpopular.
I think you’re right. I think they might keep their powder dry on this one and shoot down something less public, less visible, as a way of saying FTC we still have our eye on you. Just because the non-compete rule survive doesn’t mean that FTC can do whatever it wants.
And then the second point, I suspect some employers will stop using non-competes even before the rule is finalized just because they want to distinguish themselves as a better employer, as a high road company. And maybe they will also think a little bit more critically about why they’re using non-competes and realize actually we don’t have any real need for these contracts. Why not get a PR boost by not using them anymore?
TEDDY DOWNEY: Yeah. I mean, we don’t use them here. It’s been a bit of a competitive advantage for sure in terms of I think we have a lot higher retention among our employees and people seem to like it here. So I think it’s generally been helpful. So as a very, very, very limited natural experiment, there you go.
SANDEEP VAHEESAN: Right, it creates goodwill among employees. Noncompetes are ridiculously one sided and they’re not going to engender trust and respect among workers. My boss is so afraid of my leaving that they’ve tied me down with this contract. That can’t be good for morale.
TEDDY DOWNEY: Yeah, I would just never want someone to work here because they have a non-compete.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: That’s not a reason to be at to have a career. This is a bit of like I think the industry I’m in, the specifics of the industry I’m in, I don’t have, you know, just you couldn’t get good work out of someone who didn’t want to be there. I’m sure there are other industries that don’t operate in the same way. But at the same time, if you are a conscientious employer, you think, well, I’d much prefer them to be here for them actually wanting to be here than feeling constrained about leaving.
I think a good example I mean, this is in a lot of management books or whatever, but I don’t know if this is exactly analogous, but Netflix is like they’ll pay you to leave I don’t know if they still do this but you don’t want to be there. That seems a little bit weird, but it’s a similar concept. It’s just like. It’s hard to have a great product if the people who are there don’t want to be there.
SANDEEP VAHEESAN: Yeah, exactly. Employers should desire to have motivated, loyal workers who are happy to show up every morning and do the work. Yeah, I completely agree.
TEDDY DOWNEY: It seems like a better model. It seems like a better competitive advantage.
SANDEEP VAHEESAN: Right. One other quick point related to this. I’m a fan of competition making. I think that the FTC should do more rules. A couple of reasons are rules are harder to undo. A future administration has to go through the whole APA process again to repeal them. And I think rules also have an important norm creating, norm shaping function where an agency says something is bad and illegal, that obviously carries the force of law, but it’s also a signal to the public and business that this is immoral. The FTC Act speaks about unfair methods of competition. So apart from the legal effect, I think that the rule will have a positive norms shifting effect. And that’s harder to do through adjudication or guidance.
I’m hoping we see this materialize where employers publicly say we’re no longer using noncompetes. I believe Microsoft may have committed to not using non-competes last year. Maybe they saw that non-competes are going to be restricted. But I hope other employers come out and say, yeah, we’re going to get ahead of this regardless of what happens with this rule. These contracts are no longer part of our employment practice.
TEDDY DOWNEY: My last question for you while I have you. Let’s say they’re going to do three more Section 5, unfair methods of competition rulemaking in the next two years, I mean, just hypothesize. What would your three be? Or even one, two or three. What are your top priorities? What are your three top priorities?
SANDEEP VAHEESAN: Great question. I think there are so many good targets that it’s hard to narrow it down. The first would be a rule prohibiting exclusive dealing and exclusionary contracting with dominant firms. And this is something that Open Markets and a broad public interest coalition petitioned for in 2020. I think it’s a really good target because so many dominant firms use exclusive dealing to maintain their monopoly power. The FTC has already brought a number of cases against exclusive dealing, including under Joe Simons. I think that rulemaking is a logical next step. That would be number one on my list.
This might surprise you, but I don’t think the agencies have fully solved the pay-for-delay issue. The FTC has been working on it for, I think, almost 25 years now. It got a partial win in the 2013 Actavis decision. But from what I understand, pay-for-delay, or some iteration of it, is still an issue. I think the FTC should do a rulemaking making pay-for-delay agreements among branded and generic drug companies per se illegal.
TEDDY DOWNEY: And that was even a recommendation in the Chopra Khan paper, if I remember correctly. They said that would be a good example because it was or was it in yours? I can’t remember.
SANDEEP VAHEESAN: I’m not sure. I don’t think they covered it. Maybe they did. But I think would be a good target.
TEDDY DOWNEY: I’m not sure about that at all. Because that has been ongoing for so many years and there’s so much evidence about it.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: You wouldn’t need a particularly long —
SANDEEP VAHEESAN: I think that could be a fairly quick rulemaking. They have abundant evidence. I think what’s happened here is the companies are smart. They’ve stopped doing straight cash for delay. Instead, they’re entering into these complicated cross-licensing joint marketing agreements in which pay-for-delay is embedded and just happens to be the most important part of it. I think a clear, bright line against pay-for-delay would be good.
And the third and this is maybe a little bit more ambitious but I’d love to see the FTC do something on pricing, specifically predatory pricing. Because it’s almost impossible to win a predatory pricing case under the Sherman Act because of the Brooke Group case. That’s an area of law that needs to be fixed. And it’s clear that a number of venture capitalists and big tech firms view predatory pricing as their straight shot to monopoly. Going after that would have significant benefits. Just imagine if Uber hadn’t been able to engage in below cost pricing all these years. We might still have a vibrant licensed cab industry here in D.C. But licensed cabs seem to have disappeared. Same in other cities.
TEDDY DOWNEY: Yeah, I mean, the predatory pricing thing, it’s like in books it’s like almost like it’s been so long since Amazon destroyed the brick-and-mortar book market. Book companies that they’re coming back like into the Amazon spaces. Yeah, predatory pricing is, I mean, yeah, totally. There are no cabs here either.
SANDEEP VAHEESAN: That would be the hardest rule in some ways because it gets into the questions of cost accounting. What’s an appropriate measure of cost? So that would be a big rulemaking for the FTC to undertake. But if they can get a few of these other rules done, I think that should be on their list.
TEDDY DOWNEY: That would also be hard. Because, I mean, it’s not like pay-for-delay and non-competes where to your point earlier there are studies, economics studies, academic studies, across the ideological divide on those topics. No one really pay for delay is not something even like a lot of conservative economists say that actually is a good thing.
SANDEEP VAHEESAN: Right.
TEDDY DOWNEY: Predatory pricing is very dug in, much more dug in, in terms of from an ideological clash, I think.
SANDEEP VAHEESAN: You can already imagine the company’s PR efforts against the rule. The FTC wants to take away your cheap cab ride to the airport or cheap cab ride to see grandma. The FTC wants to take away your affordable goods on Amazon. It will be politically difficult because the monopolists and the venture capitalists will position themselves as the champion of consumers.
TEDDY DOWNEY: Yeah. Well, I appreciate you giving us your top three. Very interesting. We’ll be very interested to see what the FTC does from here, how this plays out in the courts, what they do on unfair methods going forward. And Sandeep, thank you for being willing to do this today and the ten years with The Capitol Forum since we started. And it was a pleasure chatting with you.
SANDEEP VAHEESAN: Yeah. Thanks so much. It’s been a lot of fun.
