The Federal Trade Commission has rejected consumer welfare and the Rule of Reason—standards that drove antitrust for 50 years—in favor of a “NeoBrandeisian” vision. This approach seeks to enhance democracy by condemning abuses of corporate power that restrict the autonomy of employees and consumers, regardless of impact on prices or wages. Pursuing this agenda, the Commission has proposed banning all employee noncompete agreements (“NCAs”) as unfair methods of competition under Section 5 of the FTC Act.
The Notice of Proposed Rulemaking (“NPRM”) articulating the Commission’s rationale found that NCAs reduce aggregate wages, harm traditionally recognized by the Rule of Reason. But the NPRM also found that nearly all NCAs are both procedurally and substantively coercive, because employers use overwhelming bargaining power to impose agreements that restrict employees’ post-employment autonomy. The invocation of coercion as distinct antitrust harm reflected NeoBrandeisian concerns about corporate power in today’s economy.
Echoing Transaction Cost Economics (“TCE”), the NPRM conceded that NCAs can encourage employee training and/or creation of trade secrets. The Commission nonetheless rejected such business justifications for two reasons. First, these benefits do not exceed NCAs’ harms. Second, NCAs are not “narrowly tailored” because alternative, albeit less effective, means can further such objectives. Both rationales assumed that the benefits of nonexecutive NCAs always coexist with all three harms described above.
This Essay critiques the Commission’s assumption that NCAs’ benefits coexist with both forms of coercion and the resulting rejection of business justifications for NCAs. The coexistence assumption echoes Price Theory’s partial equilibrium tradeoff (“PET”) model, which informs the same consumer welfare standard the Commission has rejected. This model treats the creation of market power and resulting misallocation of resources as the sole antitrust harm, to be balanced against any productive efficiencies, which necessarily coexist with such harm.
However, the Commission’s NeoBrandeisian focus on coercion introduced a new form of antitrust harm, which entailed a particular process of contract formation, independent of any impact on prices or wages. Moreover, TCE teaches that, unlike efficiencies contemplated by Price Theory, efficiencies generated by NCAs are non-technological in nature and often arise in low transaction cost settings. Taken together, the altered definition of harm and TCE’s account of efficiencies undermine application of the PET model’s coexistence assumption when assessing business justifications for NCAs.
In particular, TCE predicts that fully-disclosed NCAs that produce significant benefits reflect voluntary contractual integration between the parties and are thus not procedurally or substantively coercive. Proof that such NCAs create benefits undermines the prima facie case of coercion and obviates any need to balance benefits against supposed coercive harms. The Commission’s assessment of business justifications and condemnation of all nonexecutive NCAs as coercive therefore rested upon an exaggeration of the harms that NCAs produce and may have reached an erroneous result.
To be sure, proof that some or even all NCAs are voluntary does not refute the findings that NCAs have an aggregate negative impact on wages. Perhaps this narrower set of harms still outweighs the benefits that NCAs produce. Or perhaps an assessment of “balanced alternatives” would still conclude that NCAs are on net inferior to alternatives. However, the NPRM performed no such assessment. As a result, the Commission must reconsider its rejection of business justifications, this time unconstrained by the inapposite PET model.
The Commission’s erroneous exaggeration of harms highlights the perils of abrupt and ill-considered normative change. The Commission developed its Section 5 enforcement policy without public input and ignored public comment and academic literature explaining TCE’s account of voluntary contract formation. Instead of adapting its methodology of assessment to its new normative account of Section 5, the Commission implicitly fell back on the PET model—developed to assess entirely different economic phenomena. The Commission should reconsider its new normative account of antitrust harm or revise its methodology of assessing business justifications to reflect the best economic account of the formation of NCAs.
To read this Essay, please click here: New Vision, Old Model: How the FTC Exaggerated Harms When Rejecting Business Justifications for Noncompetes.
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