Trump Judge Nixes Biden Ban On Noncompetes, Because It's An Election Year And WE CAN'T HAVE THAT

Popular policy before we vote? This aggression will not stand, man!

It’s exhausting living in a country where one political party believes that the government should do stuff and the other believes that the government should do nothing.* And yet, here we are, locked in with a pack of nihilists who believe that America’s government should refrain from doing anything to improve the lives of its citizens, particularly if that improvement might make a CEO feel sad, or, even worse, slightly less rich.

No one has done more to ensure that the US government does nothing than Senator Mitch McConnell. First he normalized the filibuster, effectively breaking Congress, while depriving Democrats of the ability to do stuff even when they held the White House and legislative majorities. And then, to block Democrats from doing stuff via administrative rulemaking, McConnell stacked the judiciary with activists willing to strike down any Democratic president’s executive action on the flimsiest of pretexts.

The capstone of this decades-long project was the Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo, which overturned Chevron deference and invited federal judges to substitute their own judgment for that of the sitting president. For decades, courts were obliged to defer to a federal agency’s interpretation of statutes; now McConnell and Leonard Leo’s handpicked goons in robes are empowered to make sure that government stays broken. 

And if this has the effect of stopping Democrats from enacting popular policies while allowing Republicans to claim that government can’t work, well, that’s a feature, not a bug.

So it was probably inevitable that Republicans would go after the Biden administration’s ban on noncompete clauses for low-level employees. 

What is a noncompete, and why does it suck?

A noncompete clause bars employees from leaving and going to work for a competitor during some specified period after separation. Historically, employers justified these provisions as necessary to protect trade secrets and ensure that workers didn’t take specialized training and immediately sell their services to the competition.

The reality is often quite different. The sandwich chain Jimmy Johns was notorious for requiring its minimum-wage employees to sign a noncompete that said:

Employee covenants and agrees that, during his or her employment with the Employer and for a period of two (2) years after … he or she will not have any direct or indirect interest in or perform services for … any business which derives more than ten percent (10%) of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches and which is located with three (3) miles of either [the Jimmy John’s location in question] or any such other Jimmy John’s Sandwich Shop.

With more than 2,800 Jimmy John’s outlets across 48 states, a prohibition on working at any restaurant within three miles of any Jimmy John’s for two years is functionally a ban on working in food service at all.

Amazon reportedly makes its seasonal employees, warehouse workers, and even interns sign a noncompete promising not to “engage in or support the development, manufacture, marketing, or sale of any product or service that competes or is intended to compete with any product or service sold, offered, or otherwise provided by Amazon (or intended to be sold, offered, or otherwise provided by Amazon in the future).” 

That would appear to be a blanket ban on engaging in commerce, and, like Jimmy John’s super-oppressive noncompete clause, is likely unenforceable. But if you’re a low-wage worker, you probably don’t have the resources to hire a lawyer to tell you that, which means that the company has tremendous leverage to force you not to quit or to demand payment from you if you do.

The Biden Administration takes action

On May 7, the Federal Trade Commission issued 16 CFR Part 910, the “Noncompete Rule,” heavily restricting the use of noncompete clauses in employment contracts. Specifically, the new rule would:

1. Ban all new noncompete clauses in any employment agreement;

2. Invalidate existing noncompete clauses for any employee other than “senior executives” in policymaking positions who make more than $150,000 per year;

3. Prohibit employers from telling prospective employers that any employee is subject to a noncompete clause; and, perhaps most importantly,

4. Require employers to notify employees that their noncompete clause will not and cannot be enforced, using the model language contained in the rule.

California has had a similar ban on noncompetes for the last 25 years. This is not because it’s a crazy, liberal state, but because noncompete clauses tend to depress economic growth in the tech sector, and tech startups often grow by luring under-appreciated talent away from the FAANGs. (That’s how Google itself got started, back in the day.) Banning noncompetes gives nimble and innovative startups a chance to compete against the biggest players in the field.

The federal Noncompete Rule had no effect on other labor agreements. Employers would still be allowed to impose bans on expropriation of trade secrets and other confidential information, such as customer lists. They could still bar employees from soliciting firm clients or disparaging their former employer. In other words, employers could still accomplish their purported goals, without erecting massive barriers to worker mobility.

But it was not meant to be, at least not yet.

No points will be awarded for guessing where this regulation was challenged.

On August 20, Judge Ada Brown, a Trump appointee in the Northern District of Texas, granted a preliminary injunction, blocking the Noncompete Rule from going into effect just two weeks from now.

Judge Brown held that it was likely that the FTC exceeded the statutory authority delegated to it by enacting the Noncompete Rule. And while this is not a decision on the merits, the court found that the plaintiffs had demonstrated a “substantial likelihood” of success on their claims — which gives you a pretty good idea of how the court thinks this is going to shake out in the end. The case, which is captioned Ryan v. FTC, is being prosecuted by the Chamber of Commerce, who conveniently found itself a plaintiff in Dallas so as to tee this one up for the Fifth Circuit.

Judge Brown began her ruling with a history of the Federal Trade Commission, which was created in 1914 to protect consumers and promote competition. Congress  delegated to the agency the power to prevent both “unfair methods of competition” and “unfair or deceptive acts or practices,” so long as such practices are “in or affecting commerce.”

It’s pretty hard to argue that noncompetes like Jimmy John’s constitute something other than “unfair methods of competition.” So instead the plaintiffs claimed that, while Congress delegated the power to prevent such unfair methods of competition, it did not delegate the power to create substantive rules to accomplish this goal. In their telling, the FTC can only enact procedural regulations to carry out its statutory mandate.

This is a very strange argument, given that the very next section of the FTC Act, Section 6(g), empowers the FTC to “make rules and regulations for the purpose of carrying out the provisions of this subchapter.” And before Republicans broke the judiciary, this would have been a losing, possibly sanctionably frivolous argument for at least three reasons beyond “duh.” 

First, any court would have been bound by the Chevron doctrine to acknowledge the century-plus history of the FTC actually promulgating substantive rules. Second, even in the absence of Chevron deference, any court would have to wrestle with the 1973 case National Petroleum Refiners Ass’n v. FTC, in which the DC Circuit explicitly held that:

[J]udicial precedents concerning rule-making by other agencies and the background and purpose of the Federal Trade Commission Act lead us liberally to construe the term "rules and regulations." … And the overt language of both Section 5 and Section 6, read together, supports its use in Section 5 proceedings.

Our belief that "rules and regulations" in Section 6(g) should be construed to permit the Commission to promulgate binding substantive rules as well as rules of procedure is reinforced by the construction courts have given similar provisions in the authorizing statutes of other administrative agencies.

And third, nationwide injunctions were highly disfavored. A district court judge might issue a ruling that was binding in one state, or perhaps throughout the affected circuit. Trial judges, particularly those outside the federal court in DC, would rarely have issued a preliminary injunction barring the federal government from acting nationwide.

But we are in a brave new world where a single judge in the Northern District of Texas can decide, based on her idiosyncratic review of “the history of the FTC’s empowerments,” that National Petroleum was wrongly decided fifty-plus years ago, and the FTC’s view of its own authority is entitled to no weight.

How bad is it?

Judge Brown’s reasoning borders on the absurd. First, she notes that, in the wake of National Petroleum, the FTC did in fact “promulgate[] several rules based on this rulemaking power.” But the court somehow found it relevant that “from 1978 to the announcement of the Non-Compete Rule, the Commission did not promulgate a single substantive rule under Section 6(g).”

If you’re not a right-wing, activist loon, that’s an argument for the FTC’s ability to regulate, not against it. Clearly the agency used its judicially-approved power to enact substantive rules regulating unfair competition immediately following the National Petroleum decision, and then decided not to during a long run of mostly conservative Presidents after the arbitrarily-chosen date of 1978.

Judge Brown thinks … well, it’s not clear what she thinks, because she makes no effort to distinguish National Petroleum or to explain why no one in the Fifth Circuit saw fit to issue a contrary ruling it in the past 51 years.

The next paragraph is, if anything, even less scrutable:

During the 90th Congressional session in 1967 and 1968, Congress enacted amendments expressly allowing force of law rulemaking related to specific subjects. If Section 6(g) had already given the Commission such substantive rulemaking power, these amendments would be superfluous.

Note that Judge Brown looks back to 1967 and 1968, before the DC Circuit decided National Petroleum. In other words, the far more parsimonious interpretation of this legislative history is that the question of substantive rulemaking was potentially ambiguous in 1967, leading Congress to be explicit with subsequent grants of authority to the FTC via amendments. But once the DC Circuit weighed in, Congress knew that the FTC would be permitted to formulate regulations, and so it let the agency get on with its business.

Judge Brown concludes that “the text and the structure of the FTC Act reveal that the agency lacks substantive rulemaking authority with respect to unfair methods of competition,” and so the noncompete ban must be enjoined.

Arbitrary and capricious? This ruling is arbitrary and capricious!

Just in case this wildly ahistorical analysis doesn’t cut it with the Fifth Circuit, Judge Brown supplies an alternate basis for her order, finding that the Noncompete Rule itself violated the Administrative Procedure Act because it was “arbitrary and capricious.”

The “arbitrary and capricious” standard is an incredibly high bar to overturning administrative agency action, and not one that is generally applied to a 570-page Final Rule promulgated after six years of investigative factfinding.

As the Supreme Court put it in Motor Vehicle Association v. State Farm, a rule is arbitrary and capricious if:

[T]he agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. 

In Judge Brown’s view, the Noncompete Rule “imposes a one-size-fits-all approach with no end date, which fails to establish a “rational connection between the facts found and the choice made.” In particular, she faults the FTC for not “considering less disruptive alternatives” to the ban, which the FTC was absolutely not required by law to do. She also opines that “no state has enacted a non-compete rule as broad as the FTC’s rule,” which is only correct if Judge Brown thinks California is not a state.

The court blithely waves away binding precedent, confident that this case is headed to the most activist Circuit Court in the country, who will fill in whatever blanks necessary to achieve the desired result. Indeed, the entire analysis purporting to apply the arbitrary and capricious standard takes up less than three pages in a paltry 27-page decision.

This is not a serious piece of legal analysis; it’s a monkey wrench thrown into the gears of the “administrative state” as part of a systemic effort to ensure that government fails when it does stuff. Like blocking student loan forgiveness, this is meant to deprive the Biden-Harris administration of a signature accomplishment in advance of the 2024 election.

So, now what?

On the flimsiest of justifications, a single judge in Texas has just upended a nationwide rule that was set to go into effect in two weeks’ time. This required her to set aside a half-century of history, tradition, and practice, not to mention well-reasoned opinions from the DC Circuit and the Supreme Court itself. Businesses that had been scrambling (and paying legal fees!) to rewrite their employment contracts to comply with the new rule will now have to guess whether six conservative justices will play along with this farce and allow the rule to stay blocked. 

This is no way to run a country. Well, not unless your plan is to convince Americans that government doesn’t work by making damn sure that it doesn’t. In that case, bang up job!

* Except regulate women’s bodies.