Column: A Trump judge blocks another pro-worker Biden initiative, this one involving noncompete clauses
Noncompete clauses in employment contracts are sterling examples of the give-them-an-inch-and-they’ll-take-a-mile principle in business behavior.
Once applied chiefly to executives, engineers and others with access to a company’s trade secrets, they have expanded to cover almost anybody — low-wage security guards, rank-and-file factory workers and even fast-food counter workers.
A recent academic survey estimated that nearly 1 in 5 American workers, or about 30 million people, are subject to noncompetes.
Noncompetes have long faced significant legal hostility because of their often blunt prohibition on employee mobility.
— Starr, Prescott and Bishara (2020)
Although the provisions are often described as noncompete “agreements,” the survey found that the vast majority of workers haven’t negotiated any such agreement with their employers, and about one-third are presented with the restriction after they’ve already accepted a job offer.
A couple of other points: Noncompetes tend to suppress wages. They also undermine innovation.
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For these and other reasons, the Biden administration took aim at noncompete clauses in 2021, instructing the Federal Trade Commission to “curtail” those that “may unfairly limit worker mobility.”
After more than a year of study, the FTC followed through with a proposed rule, issued April 23 and scheduled to take effect Sept. 4, that banned new noncompetes and forbade the enforcement of existing clauses except for senior executives who were already subject to the restrictions.
You probably know what happened next: Big Business, in the form of the U.S. Chamber of Commerce, sued to block the FTC’s rule. The lawsuit was filed not in Washington, D.C., where the agency resides, but in Texas, where it was almost certain to come before a conservative judge appointed by a Republican.
Sure enough, it came before federal Judge Ada Brown of Dallas, a Trump appointee, who on July 3 blocked the FTC from implementing or enforcing its rule until further notice.
The billionaire owners of Wonderful Co. — grower of almonds and pistachios — say a California farm labor law is unconstitutional.
Brown says she will rule by Aug. 30, less than a week before the rule is set to take effect, on whether her decision will give relief only to the plaintiffs in the case — a Dallas tax firm founded by a former tax advisor to then-President Trump, the Chamber of Commerce, and other business associations — or apply nationwide.
Here’s the background.
As the academic economists observed in their survey, published in 2020, “noncompetes have long faced significant legal hostility because of their often blunt prohibition on employee mobility.” But they’ve been tolerated as long as they applied only to high-profile executives or professionals who might have access to proprietary information or clients.
Only three states outlaw noncompete clauses: California (where they were rendered unenforceable by law in 1872), Oklahoma and North Dakota. The New York Legislature voted to outlaw them last year, but Gov. Kathy Hochul vetoed the bill, bowing to pressure from Wall Street and business lobbyists.
The chamber’s lawsuit is chock full of risible misrepresentations. “For hundreds of years,” it says, “employers and workers have had the freedom to negotiate mutually beneficial non-compete agreements.” Among their virtues, the chamber asserts, is that they “incentivize investment in research and development ... and facilitate the sorts of collaborative work environments needed for firms to innovate.”
The truth is just the opposite. Leaving aside the flagrant lie that noncompete clauses are the product of employer-employee “agreements,” evidence for the drawbacks of noncompete clauses — and for the value of eliminating them — is indisputable. One need not look further than the explosion of innovation in Silicon Valley, which was built by talented scientists and engineers who had the freedom to move from firm to firm, or start their own without interference from their employers.
Noncompete clauses push down wages and trap workers in lousy jobs, so of course they’re beloved by employers. The FTC wants to change that.
Among the 400 engineers attending a 1969 conference in Silicon Valley (which had not yet been christened with that name), all but a couple of dozen had worked at one time or another for a single firm, Fairchild Semiconductor — which had been founded by eight former workers at Shockley Semiconductor Laboratory, some of whom would go on to found Intel Corp.
Nothing obstructed their movement — or the extraordinary level of innovation that made the valley what it remains today, the world’s leading center for technological research and development.
The economists — Evan Starr of the University of Maryland and J.J. Prescott and Norman Bishara of the University of Michigan — found that noncompete clauses keep wages low by blocking competition for workers among competing businesses. Some employers, they wrote, impose noncompete rules even when they’re legally unenforceable, in hopes that the mere threat of liability for breaching an employment contract will keep workers in place.
Big Business doesn’t have much of a case in favor of noncompete clauses. They’re the antithesis of the principles supposedly honored by “right to work” antiunion laws so beloved by employers and conservative politicians. They do, however, have a well-marked capacity to suppress wages and lock workers in lousy jobs.
There can be no question that the imposition of noncompete clauses has reached an absurd level.
The fast-food chain Jimmy John’s, for example, prohibited its employees from working at any other business that sells “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches” within up to three miles from any Jimmy John’s store and for two years after leaving the company, according to a lawsuit filed in 2016 by Illinois Atty. Gen. Lisa Madigan. The franchisor agreed to drop the clause to settle Madigan’s lawsuit and a second lawsuit filed by New York state.
Last year, the FTC sued two affiliated Michigan security firms, Prudential Security and Prudential Command, for requiring low-wage security guards to sign contracts prohibiting them from working for any competitor within 100 miles of their jobs for two years of leaving Prudential. The firms threatened the guards with $100,000 in penalties for violating the clause.
Facing a tough regulator for the first time, Facebook and Amazon are trying to sideline FTC Chair Lina Khan.
The agency also sued two glass container firms, O-I Glass of Ohio and Luxemburg-based Ardagh Group, over noncompete clauses imposed on a combined 1,700 furnace workers and other employees. Those clauses stifled innovation and competition in the glass industry, the FTC said, because it prevented rivals from finding skilled and experienced workers in an already highly concentrated industry.
Prudential’s owners and the glass companies all agreed to bans on imposing or enforcing their noncompete clauses on present or future employees.
In its current lawsuit in Texas, the Chamber of Commerce asserts that the FTC’s proposed ban on noncompete clauses exceeds the authority it was granted by Congress.
Its point, which was accepted in full by Brown, is that the agency is authorized only to make rules dealing with “unfair or deceptive acts or practices,” not “unfair methods of competition.” (The FTC responds that the “clear language” of the 1914 FTC Act gives it full authority to “prevent unfair methods of competition through ... rulemaking.”)
There’s more to the chamber’s lawsuit, however. It’s part of a concerted effort by the business community to undermine FTC Chair Lina Khan, who has worked hard to turn the agency into the vigorous protector of consumer rights that Congress envisioned in 1914, but which a succession of leaders allowed to fade into near-uselessness.
Taking a cue from attacks by Elon Musk and Trader Joe’s on the National Labor Relations Board, the chamber contends that the FTC itself is unconstitutional, because its commissioners can’t be removed by the president at will — they serve for seven years and can be removed only for “inefficiency, neglect of duty, or malfeasance in office.”
Rather than offer its workers better pay and working conditions, a Wisconsin hospital sued to keep them from leaving.
(Franklin Roosevelt learned this the hard way, when the Supreme Court overturned his firing of a Republican FTC commissioner in 1935; FDR’s irritation at that decision contributed to his decision to pursue a court-packing scheme, which failed.)
The federal courts generally haven’t looked kindly on these collateral attacks on federal agencies, however.
In filing its lawsuit, the chamber followed Big Business’ familiar and cynical practice of “forum-shopping,” or hunting for a federal court predestined to see things its way and willing to issue nationwide injunctions blocking Biden initiatives. For this case, it settled on federal court in Dallas, where only one of the eight sitting judges was appointed by a Democrat (Bill Clinton). Of the remaining seven, three are Trump appointees, including Brown.
Forum-shopping, especially among federal courts in Texas, has become such an embarrassment to the federal judiciary that the Judicial Conference of the United States, which sets policy for the federal courts, issued a statement in March calling on the district courts to find fairer ways to assign cases so they don’t all go to GOP-appointed judges.
David Godbey, the chief judge of the Northern District of Texas, where the chamber’s case landed, has refused to do so. Godbey is an appointee of George W. Bush. In any event, the likelihood that random assignment of the chamber’s lawsuit would be heard by a Republican appointee was obviously strong. Any appeal from Brown’s ruling would come before the U.S. 5th Circuit Court of Appeals, the dumbest and most reactionary appellate court in the land.
It’s likely that this issue will land before the Supreme Court. A second case challenging the FTC rule brought by a Philadelphia-area tree-trimming service backed by a right-wing legal foundation is being heard by a Biden-appointed judge, Kelley Brisbon Hodge, who says she will issue a preliminary ruling by July 23. If she backs the FTC and is upheld by the U.S. 3rd Circuit Court of Appeals, the Supreme Court may have to take the case to resolve any conflict. That means the FTC rule is likely to remain in limbo well into next year, or even beyond.
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