The FTC Takes Its Turn To Feel The Regulator's Exhilaration

It’s hard to imagine any job more excruciatingly dull than that of the Washington regulator. You beaver away for months on end generating 300 or 500 page documents justifying the latest the latest agency finaglings, all of which text needs to be cleared with scores of co-participants via endless meetings and by repeated circulation of marked-up drafts that draw hundreds of inconsistent edits from self-important functionaries. Ugh!

But then, into this miasma of infinite boredom, from time to time, there intrudes a frisson of great excitement. This happens when the agency decides to seize control and transform a large swath of the economy by its own edict. New people have arrived with a mission to save the world. Ancient statutes are re-analyzed, and vast new powers magically uncovered. The transformative edict goes out. The sense of exhilaration is overwhelming. Finally the evil corporate interests will be brought to heel. Wow, are we important people here! So what if we weren’t elected and have no legislative powers under the Constitution? This project is way too important to yield to such minor quibbles. And anyway, who’s going to stop us?

During the Biden years, most of this regulatory exhilaration has been reserved for the environmental bureaucracies that have been ordering up the transformation of the energy economy. But other bureaucracies are not about to let themselves get relegated to boring irrelevancy. They have a compelling institutional need to seize the moment.

The latest agency to make its grab for the excitement of the limelight is the FTC (Federal Trade Commission). On Tuesday the FTC announced the issuance of a Final Rule to ban what is known as “non-compete” agreements throughout the economy. According to the FTC’s Rule document (which is 570 pages long), the Rule takes effect in 120 days, which would mean August. The Rule does not just ban non-compete agreements going forward, but also purports to make existing non-compete agreements unenforceable, except for those involving a handful of the most senior executives.

Non-compete agreements have been a fixture of the American corporate world for many decades, undoubtedly well more than a century for at least some of them. They are agreements between employer and employee under which the employee agrees not to work for a competitor of the employer upon departure from employment. They come in near infinite variations of terms and conditions, on such things as how long the non-compete restriction persists, whether it only persists as long as the employer is paying severance, the geographic scope of the restriction, and many other things.

Prior to now, non-compete agreements have been heavily regulated, but only at the state level. The large majority of the states allow non-competes in many to most circumstances, but universally there are severe limits on what is allowed. Although many states have statutes regulating some or many aspects of non-competes, most of the rules have been developed via the common law, that is, via case by case adjudication in courts of the reasonableness of different sorts of non-compete agreements in different circumstances. This is one of the areas that I practiced in during my legal career, and I know a lot about it. No two states have identical rules, but there are many common themes that run through the approaches taken by the different states. For example, all states that allow non-competes at all place limits of “reasonableness” on the length of non-competes that will be allowed, with maximum allowable periods ranging from as short as a few months to as long as three years in special circumstances (and even unlimited time periods in the case of non-competes associated with sale of a business). Shorter allowed periods are the rule for lower-level employees, while longer allowed periods often apply to higher-level employees, particularly when there is compensation that is specifically tied to the non-compete. Some states follow the “blue pencil” rule, where a court that finds a non-compete unreasonable will modify it to be reasonable; while other states follow the rule that any non-compete found unreasonable will be stricken entirely, thus incentivizing employers not to overreach.

A handful of states by statute have disallowed non-competes in all or almost all circumstances. California has had such a rule since 1872 (in other words, it’s not just part of the current progressive craziness). Other states that mostly ban all non-competes include Minnesota, North Dakota, Nebraska and Oklahoma.

So here we have a detailed body of state law, developed over a period of a century and more, with careful consideration by thousands of state legislators and judges of rules appropriate to infinitely varied factual circumstances. And now today, the FTC has decided to step in with its big foot and just outlaw all of it at the federal level.

So what has changed suddenly to make this a matter of urgent federal interest? Perhaps there might be a new statute enacted by Congress?

Not at all. The FTC claims to find its authority for the new Rule in Section 5 of the FTC Act. That statute was enacted in 1914, the time when the agency was created during the administration of Woodrow Wilson. Indeed the creation of the FTC was a signature achievement of Wilson in his effort to “modernize” the federal government to enable replacement of the constitutional balance-of-powers order with rule by “expert” bureaucracies. The wording of the statute has not changed in the intervening 110 years. Here is the relevant text of Section 5:

Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

Has anything happened in the last 110 years to make non-competes any more “unfair” than they were back in 1914? Of course not. Indeed, up until now Section 5 has been thought to relate to the FTC’s mission as an enforcer of anti-trust law, rather than granting it infinite authority to micro-manage anything that might be “unfair” in the entire economy. But the current Democratic FTC commissioners, and particularly the Chair (Lina Khan), do not like non-competes and think that they can get away with this gigantic power grab. They claim to rely on some “new research” that, they say, shows that non-competes harm employees throughout the economy, even those not subject to them. Sure. Really, what they want is that regulator’s exhilaration. And they are not going to be denied.

The FTC’s action is on absurdly shaky legal ground. Yesterday — one day after the FTC’s announcement of its Final Rule — business groups including the Chamber of Commerce and the Business Roundtable had already filed lawsuits to have the Rule overturned. I find it hard to believe that the Supreme Court will allow this kind of naked power grab by a regulatory agency, purportedly under a 110 year old statute that doesn’t mention anything about the entire area of law suddenly being pre-empted. But while we wait a few years for the case to reach that forum, there are tens of thousands of businesses that have negotiated and paid for non-competes that are suddenly illegal, at least for now; and the FTC will have the sadistic fun of watching those businesses squirm. It can be so much fun to be a regulator. When the Rule gets overturned a few years from now, no FTC commissioner or other employee involved in this gambit will face any consequences.

Meanwhile, not to be outdone, the environmental regulators are out showing the pipsqueak FTC who the real big fish are in this pond. Just today, EPA finalized a rule requiring coal power plants to cut emissions by 90% by 2039 or else close. That could only conceivably be done with carbon capture technology that does not exist today in any form that can be deployed economically. And yesterday, the White House announced a national goal to cut emissions from freight shipping down to zero by 2050. Electrify all trucks, freight trains, and ocean shipping — nothing to it! It’s complete fantasy, but oh what exhilaration you can feel as a regulator announcing such edicts.