FTC Bans Non-Competes, Sparks Instant Lawsuit: The War For Worker Freedom

Legal Issues

from the stopping-indentured-servitude-is-a-major-question dept

This is a frustrating article to write. The FTC has come out with a very good and important policy ruling, but I’m not sure it has the authority to do so. The legal challenge (that was filed basically seconds after the rule came out) could do way more damage not just to some fundamental parts of the administrative state, but to the very underlying policy that the FTC is trying to enact: protecting the rights of workers to switch jobs and not be effectively tied to an employer in modern-day indentured servitude with no realistic ability to leave.

All the way back in 2007, I wrote about how non-competes were the DRM of human capital. They were an artificial manner of restricting a basic freedom, and one that served no real purpose other than to make everything worse. As I discussed in that post, multiple studies done over the previous couple of decades had more or less shown that non-competes are a tremendous drag on innovation, to the point that some argue (strongly, with data) that Silicon Valley would not be Silicon Valley if not for the fact that California has deemed non-competes unenforceable.

The evidence of non-competes being harmful to the market, to consumers, and to innovation is overwhelming. It’s not difficult to understand why. Studies have shown that locking up information tends to be harmful to innovation. The big, important, innovative breakthroughs happen when information flows freely throughout an industry, allowing different perspectives to be brought into the process. Over and over again, it’s been shown that those big breakthroughs come when information is shared and multiple companies are trying to tackle the underlying problem.

But you don’t want companies colluding. Instead, it’s much better to simply ban non-competes, as it allows workers to switch jobs. This allows for more of a free flow of information between companies, which contributes to important innovations, rather than stagnant groupthink. The non-competes act as a barrier to the free flow of information, which holds back innovation.

They’re really bad. It’s why I’ve long supported states following California’s lead in making them unenforceable.

And, of course, once more companies realized the DRM-ish nature of non-competes, they started using them for more and more evil purposes. This included, somewhat infamously, fast food workers being forced to sign non-competes. Whatever (weak) justification there might be for higher-end knowledge workers to sign non-competes, the idea of using them for low-end jobs is pure nonsense.

Non-competes should be banned.

But, when the FTC proposed banning non-competes last year, I saw it as a mixed bag. I 100% support the policy goal. Non-competes are actively harmful and should not be allowed. But (1) I’m not convinced the FTC actually has the authority to ban them across the board. That should be Congress’ job. And, (2) with the courts the way they are today, there’s a very high likelihood that any case challenging such an FTC rule would not just get tossed, but that the FTC may have its existing authority trimmed back even further.

Yesterday, the FTC issued its final rule on non-competes. The rule bans all new non-competes and voids most existing non-competes, with the one exception being existing non-competes for senior executives (those making over $151,164 and who are in “policy-making positions”).

The rule is 570 pages long, with much of it trying to make the argument for why the FTC actually has this authority. And all those arguments are going to be put to the test. Very shortly after the new rule dropped (long before anyone could have possibly read the 570 pages), a Texas-based tax services company, Ryan LLC, filed a lawsuit.

The timing, the location, and the lawyers all suggest this was clearly planned out. The case was filed in Northern Texas. It was not, as many people assumed, assigned to judicial shopping national injunction favorite Matthew Kacsmaryk. Instead, it went to Judge Ada Brown. The law firm filing the case is Gibson Dunn, which is one of the law firms you choose when you’re planning to go to the Supreme Court. One of the lawyers is Gene Scalia, son of late Supreme Court Justice Antonin Scalia.

Also notable, as pointed out by a lawyer on Bluesky, is that the General Counsel of Ryan LLC clerked for Samuel Alito (before Alito went to the Supreme Court) and is married to someone who clerked for both Justices Alito and Thomas. She also testified before the Senate in support of Justice Gorsuch during his nomination.

The actual lawsuit doesn’t just seek to block the rule. It is basically looking to destroy what limited authority the FTC has. The main crux of the argument is on more firm legal footing, claiming that this rule goes beyond the FTC’s rulemaking authority:

The Non-Compete Rule far exceeds the Commission’s authority under the FTC Act. The Commission’s claimed statutory authority—a provision allowing it “[f]rom time to time” to “classify corporations and . . . make rules and regulations,” 15 U.S.C. § 46(g)—authorizes only procedural rules, as the Commission itself recognized for decades. This is confirmed by, among other statutory features, Congress’s decision to adopt special procedures for the substantive rulemaking authority it did grant the Commission, for rules on “unfair or deceptive acts or practices.”

I wish this weren’t the case, because I do think non-competes should be banned, but this argument may be correct. Congress should make this decision, not the FTC.

However, the rest of the complaint is pretty far out there. It’s making a “major questions doctrine” argument here, which has become a recent favorite among the folks looking to tear down the administrative state. It’s not worth going deep on this, other than to say that this doctrine suggests that if an agency is claiming authority over “major questions,” it has to show that it has clear (and clearly articulated) authority to do so from Congress.

Is stopping the local Subway from banning sandwich makers from working at the McDonald’s down the street a “major question”? Well, the lawsuit insists that it is.

Moreover, even if Congress did grant the Commission authority to promulgate some substantive unfair-competition rules, it did not invest the Commission with authority to decide the major question of whether non-compete agreements are categorically unfair and anticompetitive, a matter affecting tens of millions of workers, millions of employers, and billions of dollars in economic productivity.

And then the complaint takes its big swing: the whole FTC is unconstitutionally structured.

Compounding the constitutional problems, the Commission itself is unconstitutionally structured because it is insulated from presidential oversight. The Constitution vests the Executive Power in the President, not the Commission or its Commissioners. Yet the FTC Act insulates the Commissioners from presidential control by restricting the President’s ability to remove them, shielding their actions from appropriate political accountability.

This is taking a direct shot at multiple parts of the administrative state, where Congress (for very good reasons!!!) set up some agencies to be independent agencies. They were set up to be independent to distance them from political pressure (and culture war nonsense). While the President can nominate commissioners or directors, they have limited power over how those independent agencies operate.

This lawsuit is basically attempting to say that all independent agencies are unconstitutional. This is one hell of a claim, and would do some pretty serious damage to the ability of the US government to function. Things that weren’t that political before would become political, and it would be a pretty big mess.

But that’s what Ryan LLC (or, really, the lawyers planning this all out) are gunning for.

The announcement that Ryan LLC put out is also… just ridiculous.

“For more than three decades, Ryan has served as a champion for empowering business leaders to reinvest the tax savings our firm has recovered to transform their businesses,” the firm’s Chairman and CEO, G. Brint Ryan, said in a statement.. “Just as Ryan ensures companies pay only the tax they owe, we stand firm in our commitment to serve the rightful interest of every company to retain its proprietary formulas for success taught in good faith to its own employees.

Um. That makes no sense. The FTC ruling does not outlaw NDAs or trade secret laws. Those are what protect “proprietary formulas.” So, the concern that Mr. Ryan is talking about here is wholly unrelated to the rule.

Last spring, Ryan “sought to dissuade” the FTC from imposing the new rule by submitting a 54-page public comment against it. In the comment, Ryan called non-compete agreements “an important tool for firms to protect their IP and foster innovation,” saying that without them, firms could hire away a competitor’s employees just to gain insights into their competitor’s intellectual property. Ryan added that the rule would inhibit firms from investing in that IP in the first place, “resulting in a less innovative economy.”

Again, almost everything said here is bullshit. They can still use NDAs (and IP laws) to protect their “IP.” That’s got nothing to do with non-competes.

As for the claim that it will result in “a less innovative economy,” I’ll just point to the fact that California remains the most innovative economy in the US and hasn’t allowed non-competes. Every single study on non-competes has shown that they hinder innovation. So Ryan LLC and its CEO are full of shit, but that shouldn’t be much of a surprise.

Anyway, this whole thing is a stupid mess. Non-competes should be banned because they’re awful and bad for innovation and employee freedom. But it should be Congress banning them, not the FTC. But, now that the FTC has moved forward with this rule, it’s facing an obviously planned out lawsuit, filed in the Northern District of Texas with friendly judges, and the 5th Circuit appeals court ready to bless any nonsense you can think of.

And, of course, it’s happening at a time when the Supreme Court majority has made it pretty clear that dismantling the entire administrative state is something it looks forward to doing. This means there’s a pretty clear path in the courts for the FTC to lose here, and lose big time. One hopes that if the courts are leaning in this direction, they would simply strike down this rule, rather than effectively striking down the FTC itself. But these days, who the fuck knows how these cases will go.

And even just on the issue of non-competes, my fear is that this effort sets back the entire momentum behind banning them. Assuming the courts strip the FTC rule, many will see it as open season on increasing non-competes, and the FTC would likely be stripped of any power to challenge the most egregious, anti-competitive ones.

Non-competes should be banned. But the end result of this rule could be that they end up being used more widely. And that would really suck.

Filed Under: administrative state, ftc, innovation, major questions doctrine, non-competes, section 5 authority, supreme court
Companies: ryan llc