Volume 100

Alan J. Meese

Agencies have imperfect information about conduct they regulate. This problem is particularly acute when identical conduct has differing effects in various markets. Determining the economy-wide impact of such conduct can be difficult or impossible. The FTC faces such a challenge. The Commission has issued a rule banning the nation’s 30 million employee noncompete agreements (“NCAs”) as unfair methods of competition under Section 5 of the FTC Act.The Commission determined that NCAs restrict labor market competition and likely reduce aggregate wages, establishing a presumptive violation. The Commission also found that nearly all NCAs are both procedurally coercive—because employers use overwhelming bargaining power to impose them—and substantively coercive—because they restrict employees from starting new firms or accepting offers from rival employers. The Commission also implied that procedural coercion was a necessary condition for substantive coercion. The Commission then assessed possible business justifications. Echoing Transaction Cost Economics (“TCE”), the Commission concluded that NCAs sometimes produce cognizable benefits, increasing productivity and product quality. The Commission framed the inquiry as assessing whether, “overall,” NCAs’ harms exceed benefits. Determining the overall impact of30 million contracts is a daunting task. The Commission employed a creative proxy, however. The Commission hypothesized that employers would share benefits of NCAs by paying premium wages to employees with such agreements. However, most studies find a negative correlation between state-level enforceability of NCAs and wages, implying that harms exceed benefits. The Commission, therefore, rejected justifications and indiscriminately condemned all NCAs.

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