United States: State Attorneys General Urge FTC To Consider Labor Issues In Antitrust Enforcement

Last Updated: August 6 2019
Article by Dallin R. Wilson and Dawn Mertineit

A group of 18 state attorneys general (the "AGs") recently filed comments with the Federal Trade Commission ("FTC") in advance of a series of hearings centered on changes to antitrust and consumer protection enforcement in the 21st century. The letter identifies four major areas where recent antitrust activity involving labor issues have occurred: (1) horizontal no-poach agreements between employers; (2) vertical no-poach agreements, particularly franchise agreements; (3) non-compete agreements between employers and employees; and (4) mergers impacting labor markets. Although it may reveal the enforcement priorities of its signatories, the letter's arguments are mostly unsupported by any case law and in some respects are contrary to the Department of Justice's positions on the matters.

First, the AGs argue that naked horizontal agreements between employers to not hire each other's employees reduce competition for labor. They suggest that such agreements are per se illegal under antitrust law and "enforcement of these cases is relatively straightforward." While this is consistent with the position previously espoused by the DOJ and FTC, it is not yet clear under the case law whether such agreements are subject to the per se rule.

The letter also asserts that state enforcers have viewed vertical agreements between a franchisor and a franchisee, whereby the franchisee agrees not to hire employees of other franchisees as per se illegal. However, this contention is directly contrary to the position taken by DOJ which has argued that such agreements should be judged under the rule of reason because they may enhance interbrand competition. Not surprisingly, the letter highlights recent settlements between many of the AGs and various national fast food franchisors to stop the use of no-poach agreements in their franchise agreements. Those cases highlight that state attorneys general have independent authority to enforce both state and federal antitrust, labor, and consumer protection laws, even where the federal government chooses not to act.

With respect to non-compete agreements between employers and employees, the letter points out, as we have covered extensively in recent months, that non-compete agreements are undergoing new scrutiny at the state level. The AGs point to recent legislation in Illinois, Massachusetts, Washington, Maryland, New Hampshire, and New York that have restricted the enforcement of such agreements, in addition to California and Montana's existing bans on non-competes. Notwithstanding this recent attention however, non-competes have largely flown under the antitrust radar and are rarely involved in antitrust litigation, despite the letter's contention that they have "real world economic impact" and should be viewed as an unfair restraint on trade in some instances. By limiting worker mobility, the AGs argue, non-competes harm competition by depriving businesses the opportunity to hire available, qualified workers. The AGs also believe that non-solicitation agreements deserve antitrust scrutiny, particularly when an employer uses such agreements as de facto non-competes to enjoin an employee from taking a position with a competitor.

Although the AGs may advocate that the FTC take such positions, these positions are generally contrary to the way courts have analyzed such claims in the past. For example, the Seventh Circuit has rejected the theory that non-competition covenants contained in an agreement for the sale of a vending machine company violated the Sherman Act or Clayton Act. See Lektro-Vend Corp. v. Vendo Co. 660 F.2d 255 (1981). Likewise, the Third Circuit has held that agreements to restrict the hiring of certain employees upon the former parent's sale of a subsidiary did not violate the Sherman Act. See Eichorn v. AT&T Corp., 248 F.3d 131 (2001).

Lastly, the letter suggests that antitrust laws should be applied to mergers that result in "monopsonization, which means only one or very few buyers of a good or service instead of sellers, as in monopoly." The AGs suggest that a monopsonist employer can depress wages below competitive levels, causing sellers to exit the market, thereby decreasing the quantity of jobs and decreasing output and product quality.

The AGs recommend that the FTC incorporate labor concerns into merger reviews, by looking into whether the merger involves companies with specialized labor needs or are within the same geographic area with a small labor force. The AGs challenge "the traditional view" that layoffs are an efficiency in the merger review, suggesting that savings from employee layoffs are not always passed through to consumers. The AGs also recommend that the FTC should consider using Section 5 of the FTC Act to stop the use of non-compete, non-solicitation, and no-poach agreements "in many situations," particularly those involving low income employees or workers in the "gig" economy.

Although the FTC and DOJ have suggested in recent years that they would begin to put more of an emphasis on labor issues that restrict competition, we are skeptical that the FTC will adopt the letter's recommendations. The 18 AGs almost exclusively come from so-called "blue states" and the current administration is likely to view the letter as more a piece of political advocacy than constructive policy comments. This is particularly true given the focus on the harms to low income employees, where in our experience, very few employers seek to enforce such agreements. That being said, the letter may offer a preview into the enforcement priorities of the AGs and employers in those states should give consideration to the recommendations, especially if they seek to enforce non-compete agreements or may be considering a merger that could that could involve labor issues that might catch the AGs' attention. However, most states' legislative efforts to curb abusive enforcement of non-competes have failed to raise any concerns with antitrust laws, and state enforcement efforts have been limited primarily to the franchise context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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