Notice & Comment

Predicting the Fate of the FTC’s Non-Compete Ban, by Daniel A. Crane

On April 23, 2024, the FTC voted 3-2 to adopt a final rule prohibiting non-compete agreements in employment contracts. The two Republican Commissioners dissented on a variety of grounds, including that the FTC does not have substantive rulemaking authority under Section 6g of the FTC Act, the major questions doctrine, that the rule is arbitrary and capricious, and the non-delegation doctrine. Eugene Scalia, the former Secretary of Labor, son of the former Justice, and a partner at Gibson Dunn, filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the rule that same afternoon. This seems calculated to fast-track the case to the Fifth Circuit and from there to the Supreme Court.

So how will this all turn out? I went shopping for predictions from scholars of administrative law and antitrust law. (I posed the question both on the administrative law profs listserve and to a usual suspects list of antitrust scholars—there’s a fair bit of overlap between those groups). 17 people answered, roughly half from the ad law pool and half from the antitrust pool. As we’ll see, the predictions didn’t seem to vary based on which pool the respondents were drawn from.

Before getting to the outcomes, let me make clear that this isn’t anything like a scientific study. Think of this as me walking around a virtual faculty lounge and asking people with expertise for their off-the-cuff predictions. In terms of potential bias, some respondents expressed sympathy for the rule, others antipathy. It seems like a pretty mixed bag, but I make no warranties. So caveat emptor.

The question I asked everyone was:  “Is the most likely outcome of the challenge to the rule: (1) struck down by SCOTUS; (2) upheld by SCOTUS; (3) never reaches SCOTUS (for any reason, including denial of cert, withdrawal of rule by future administration, etc.). Please then feel free to add any commentary, for example explaining what doctrine(s) SCOTUS will cite if it strikes down, why SCOTUS will uphold, etc. This is meant to be a purely predictive exercise, so please try to be objective. Responses may be quoted, but anonymously.”

The results are … Well, lots of respondents took the liberty of fudging my three categories so I’m not going to try to report the results with numerical precision, but almost everyone thought the rule will be struck down, either by SCOTUS or a lower court. Only one person predicted that the rule will be upheld. The other 16 all seemed to predict invalidation on some ground as the most likely outcome, with a roughly equal split on whether the case will make it to the Supreme Court or meet its end in a lower court.

If the nearly unanimous view was that the rule will be invalidated, there was less consensus on the cause of death (or, at least, the formal doctrinal cause of death). The major questions doctrine had a good deal of predictive support. One respondent said: “Seems like a pretty routine application of the major questions doctrine as to whether the FTC has the rulemaking power it claims to have.  I think there’s also a decent chance the Court uses this case to overrule Humphrey’s Executor.” A concurring respondent observed that “my rationale is that any agency rulemaking that’s a big enough deal to make the front page of the New York Times is likely going to be invalidated by the courts; obviously that’s not always going to be true, but it strikes me as a pretty good rule of thumb for the current Court!” Another respondent similarly believes that the Court will “SCOTUS will not disturb the FTC’s assertion of rulemaking authority because, despite its placement, Section 6(g) is express and broad and because the Court will see rulemaking as generally preferable to adjudication as a means of policy making.  However, SCOTUS will strike the rule down on one of two grounds:  Either: MQD grounds because it is retroactive, because the rule affects the contracts of 30 million, because contracts are perceived to be largely a matter of state law, and because employment is not the FTC’s ‘wheelhouse.’  They will say that the role belongs to the Department of Labor and the National Labor Relations Board.  Or:  constitutional avoidance based on nondelegation grounds.  They’ll interpret ‘unfair competition’ to include only product competition and will exclude employment relationships.” Another respondent found “found the FTC’s discussion of 6(g) to be more persuasive than I thought it would be,” but thought the Court would invalidate “by reference to the MQD, but they might also fashion a separate clear statement rule that applies more specifically to questions involving whether agencies may engage in substantive rulemaking.”

Others thought that SCOTUS will want to avoid MDQ: “I suspect the case will give the Court an opportunity to strike down a statute without mentioning the MQD, which I think the Court would like to do in order to turn down some of the MQD-related criticisms it has been fielding.  However, the case would give Justice Gorsuch a chance to more fully connect the federalism canon and MQD (as he began to do in West Virginia v. EPA), so we could perhaps expect a separate writing from him on those grounds.” Another respondent similarly through it unnecessary to cast the case on MQD grounds and that “the grounds are likely to be that the FTC doesn’t have substantive rulemaking authority under § 6(g).” Another respondent agreed: “If any court reaches the merits, it will be held unlawful because the FTC does not have the power to issue a substantive rule to implement the UMC provision of the FTC Act.”

Some respondents thought the exact grounds on which SCOTUS will invalidate the rule are uncertain, even if the outcome is clear. One respondent summed it up: “The hard question here is probably not whether the FTC loses, it’s how it loses.” They explained: “There are so many ways to challenge the rule that the mind fairly reels. FTC rulemaking authority, unconstitutional removal protections, nondelegation, major questions doctrine, arbitrary & capricious, etc. Plus, the rule’s novelty makes it a ripe target. Whatever you think about Lina or the rule, she’s thoroughly alienated conservative legal elites, who see the current FTC as an activist, out-of-control agency. The justices’ constitutional and policy sympathies are likely to be engaged here, which means they’re more likely to stretch existing law to stop the rule.” This respondent did purport to provide some comfort for the FTC (until you read the last line): “Contrary to some of the doom and gloom, I do see a narrow path for the FTC. Noncompetes are not popular, even with judges. Many noncompetes arise from bargaining imbalances that seem well within FTC’s purview. National Petroleum Refiners is still the law in the D.C. Circuit, and though it is pretty thoroughly unpersuasive, it has been the law for 50 years (and Congress legislated against that backdrop in reshaping FTC’s rulemaking authority). And the record here is impressive, at least in its length and detail. The FTC’s odds are bad but I’d give them maybe a 10% chance of winning?” Hmmm. That’s some cold comfort!

As to whether or not the case will make it to SCOTUS, a number of respondents thought that politics will keep the decision in the lower courts. One respondent explained: “I don’t think it will reach the Supreme Court because either a Republican Administration won’t want to appeal it to the Supreme Court, or because a Democratic Administration will read the Circuit court opinion and realize that, with this Supreme Court, the rule stands no chance. The Democrats would rather have an unfavorable Circuit Court opinion than an unfavorable Supreme Court opinion.  Besides, from the Democratic perspective, who knows what terrible things the Supreme Court that invented the ‘major question’ doctrine might do.  Better not to give them an opening.”

Another respondent provided a comprehensive roadmap of the challenge’s procedural course and its consequences: “District court holds FTC has no power to issue UMC rules, and certainly not to prohibit by rule practices that are mostly not themselves UMCs. Someone will ask the FTC lawyer in court, devastatingly: ‘so, could the FTC just prohibit all horizontal mergers in markets where the HHI exceeds 1800 and save itself the hassle of merger review?’ Someone will also point out that the very recent UMC statement emphasizes the use of economic power and adverse impacts on competitive conditions, while the rule requires neither economic power nor economic effects. Appellate court affirms district court. If no administration change: FTC favors seeking cert but SG’s office opposes. If it gets there, Court issues a flagship SCOTUS opinion on rulemaking and maybe UMC itself (nondelegation), invalidating the rule at least. Pointed dicta increase doubt about the FTC’s constitutional status. If administration change: FTC declines to seek cert. Result: competition rulemaking talk recedes for a generation. Rulemaking supporters criticize, in retrospect, the FTC’s decision to test the 6(g) issue cleanly with a rule that targeted practices that were mostly not themselves UMCs, and come to think of this as a lost opportunity. Many panels and webinars proliferate, heavily featuring comparisons to Waterloo, Dunkirk, Wolf 359, etc.” 

We should give a moment for the brave contrarian: “In the simple terms of this Court, the organic statute gives the FTC authority over unfair means of competition and noncompetes on their face limit competition, the FRC has authority. Furthermore, the agency has limitations on its rule, consistent with common law history and with economic understandings. Some hardliners (Kavanaugh, Alito, Thomas) might grouse, but there are enough votes (Kagan, Jackson, Sotomayor, Roberts, Gorsuch, maybe Barrett) to uphold it.” This person may have the immense satisfaction of saying “I told you so” one day.

As to where this all leaves us, a number of the respondents expressed gloom. After predicting the rule is dead on arrival, one respondent said: “I think the state of affairs is proof if more were needed that competition policy is dead in America, if it ever had any meaningful effect, and that the hope of meaningful oversight of harmful and ill-motivated business conduct is gone, probably for the balance of our lifetimes. Good job, America.” Ouch.

In light of my non-scientific findings, here’s another non-scientific question: Whatever else they may say publicly, do the three FTC Commissioners who voted in favor of the rule (and their supporting staff) have a different prediction about the likely outcome in the courts? In other words, do they think, as most of the law profs I polled did, that it’s overwhelmingly likely that the rule will be struck down, or are they making a different prediction, either because they know something I don’t know or because they’re suffering from self-serving bias? And if they do believe it likely the courts will invalidate the rule, what’s the best account of why they’re nonetheless going forward with it? They want to “do the right” thing and “be on the right side of history.” They want to provoke Congress to give them rulemaking authority or pass a non-compete ban legislatively? It’s not certain that the rule will be struck down and it’s worth a try? Something else?

Well, we’re unlikely to get candid answers to those questions any time soon, but it probably won’t be too long before we start getting answers about what’s going to happen in the courts. Some law clerk may be drafting an order as we speak. Stay tuned!

Daniel A. Crane is the Richard W. Pogue Professor of Law at the University of Michigan.

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