An Antitrust Revolution: Why the FTC’s Renewed Focus on Coercion and Exploitation Matters

This week, we have two guest authors, our friends at Open Markets Institute: Sandeep Vaheesan, legal director, and Brian Callaci, chief economist. Sandeep and Brian research antitrust law, market structure, and their effects on workers. You can follow them both on X: @sandeepvaheesan and @brian_callaci.

Fast food workers’ Fight for $15 campaign shone a bright light on abuses of workers in franchised businesses. In particular, workers revealed the coercion not just of workers but also of the small business franchisees that employed them. Even if nominally independent franchisees wanted to raise wages, their corporate parents’ tight control over their cost and price structure made this impossible. For example, when a McDonald’s franchisee complained about the effects of maximum price requirements on her ability to make a profit, the company told her to “just pay your employees less.”

Why can a corporation like McDonald’s dictate what prices a nominally independent small business owner can charge? The answer lies in judicial changes to antitrust law since the 1970s that took a new, more permissive approach to coercion and exploitation—so long as it resulted in lower consumer prices. But opposition to economic coercion and exploitation has long been a core antitrust principle, and the Biden administration is taking steps to bring back this legal norm.

In April, the Federal Trade Commission (FTC) announced its final rule banning noncompete contracts—which prevent workers from switching jobs or leaving to start a business—for all workers. The agency estimates the rule will increase collective earnings for workers by as much as $488 billion over a 10-year period, creating more than 8,500 new businesses and catalyzing between 17,000 and 29,000 additional new patents every year.

Beyond its immediate effects on workers, the noncompete rule is significant for at least three other reasons. First, it resurrects the FTC’s underused authority, described in Section 5 of the FTC Act, to prohibit unfair methods of competition. The FTC can attack both conventional antitrust violations and, in the words of the Supreme Court, practices that are “against public policy for other reasons.” The new rule sets the stage for further, broader use of this important authority—including via enacting economy-wide competition rules like the noncompete ban—to structure markets and competition in accordance with public values. Antitrust law is about much more than stopping bad mergers or breaking up monopolists, and it is long past time for the FTC to claim the role Congress intended it to play in governing our public markets.

Second, the rule targets unfair competition in labor markets, marking a decisive turn away from the broken ideology of “consumer welfare” that has dominated antitrust since the Chicago School antitrust revolution of the 1980s, in which enforcers largely neglected the effects of corporate power on workers. Taking a narrower view of “welfare,” the ideology holds that low prices and maximum output of goods and services in the short run should be the principal goals of antitrust. (Critically, the Supreme Court has thus far confined formal application of consumer welfare to Section 1 of the Sherman Act, which prohibits restraints of trade, and has not extended it to the FTC Act and other antitrust laws.)

Third, and perhaps most important, the rule revives the historical antitrust hostility toward exploitative and coercive competitive practices. The FTC targets noncompetes for several reasons, such as that they impede efficient matching between employers and employees, transfer wealth from employees to employers, and stifle new business formation and innovation. While any of these alone would have been enough to enact the rule, the agency also articulated a theory of exploitation and coercion. Indeed, the phrase “exploitative and coercive” appears 40 times in the notice of the rule. According to the FTC, noncompetes are exploitative and coercive because employers use their power to force workers (apart from senior executives, who typically negotiate employment agreements) to acquiesce to noncompete clauses and to stop them from taking other jobs or striking out on their own.

Why does this matter? Under the consumer welfare ideology, antitrust agencies and courts have tolerated contracts that forced small, independent business owners into acting against their own interests to advance the interests of powerful trading partners, including oil companies and large manufacturers. These corporations can rob franchisees of pricing freedom—such as $5 footlongs that do not cover the cost of making the sandwiches and allegedly left many Subway franchisees “unprofitable and even insolvent”—as well as their ability to set their own hours of operation—think about the fast food restaurants that are open 24 hours a day, seven days a week. But for enforcers and courts, these contracts were “efficient” in the sense of increasing output. In other words, the agencies and courts permitted domination of the weak by the strong, as long as it led to increasing quantities sold or decreasing prices.

Before the consumer welfare era, antitrust enforcers and the courts took a much stronger stand against coercion and exploitation. As we have pointed out elsewhere, from the 1940s through the mid-1970s, antitrust enforcers and courts frowned upon powerful corporations controlling the basic business decisions of independent businesses through contracts. For example, an oil company could not limit the pricing autonomy of dealers by enforcing minimum or maximum resale prices. The Supreme Court emphasized that pricing freedom is a fundamental feature of being an independent business proprietor, and essential to the ability to compete against rivals.

Enforcers and courts also restricted the ability of corporations to lock small players into exclusive supply contracts, or to dictate to dealers and franchisees which customers they were permitted to serve. (The Open Markets Institute, where we both work, has, along with other public interest groups, petitioned the FTC to ban exclusionary contracting by dominant firms.) After the consumer welfare revolution starting in the late 1970s, corporations were freed to control nominally independent business owners—from Uber drivers to McDonald’s franchisees—through contracts as if they were employees, all while denying them rights that employees are guaranteed by statutory law. In other words, the abandonment of coercion and exploitation as an antitrust principle fueled the rise of misclassification and workplace fissuring to become the widespread method of competition it is today.

Misclassification and workplace fissuring are huge issues in their own right. But having a notion of non-coercion and non-exploitation is also important beyond the misclassification and workplace fissuring context. For example, consumer welfare proponent Professor Herbert Hovenkamp, “a dean of the antitrust bar” according to the New York Times, has argued that reviving notions of non-coercion is counterproductive—unnecessary to protect workers, because consumer welfare antitrust actually already captures the relevant harms. When output is maximized, he argues, demand for labor, and therefore for wages, are also maximized, so ultimately workers’ interests are coterminous with those of consumers.

But there are at least two common situations in which even maximum output consumer welfare fails to capture harms to workers, but where a focus on coercion and exploitation could succeed.

First, employers may use their power to increase output if they can coerce employees to work harder. Amazon, a dominant employer in many local labor markets, pays wages that are comparable, or even higher, than other jobs in its labor market, but it is notorious for high-pressure work practices that push workers to the point of injury. Similarly, one study found that the main effect of hospital mergers is not so much to lower wages but to increase the workload, by raising the number of patients for which nurses were responsible. More output can be a product of worker exploitation (more output through more input), rather than operational efficiency (more output with the same amount of input).

Second, employer monopsony power—the power to suppress wages—may in some cases reduce labor demand, and therefore reduce wages, by lowering product market output. But this only holds for employers that cannot wage discriminate, or set individualized wages for each worker. By contrast, monopsonist employers that can practice wage discrimination—as companies like Uber and Lyft are increasingly able to do, by tailoring the pay of a ride for each rider and trip—will actually produce just as much output as a company with no monopsony power. While there is not necessarily an effect on output or price for consumers, workers are exploited and paid the absolute minimum amount to show up, and wealth is transferred from them to their employers. This brings into sharp relief the real antitrust harms from employer power, which are obvious to most people’s moral intuitions but opaque to consumer welfarists: exploitation and coercion. These, not the reduction in output, are the primary antitrust harms from employer power.

As one of us has argued at length, if the FTC enacts the rule as proposed, it could be the start of a major reorientation of antitrust law. While the noncompete rule is the boldest and most forthright articulation of coercion-as-unfairness to date, the agencies have also taken smaller steps in this direction. The FTC’s policy statement interpreting its unfair methods of competition authority emphasized non-coercion themes, as did its lawsuit against Amazon, which highlighted the corporation’s coercive domination of third-party sellers on its platform. The Department of Justice has gotten into the act as well with its suit against Live Nation, which accuses the dominant promoter, ticketer, and venue operator of using its market might to coerce and exploit artists, fans, and rivals.

With the FTC rule banning noncompetes, the agency has set in motion what could be an antitrust revolution on par with the reactionary reinterpretation of antitrust by the Chicago School in the 1970s. To meet that promise, the FTC should treat the rule as a first step, and not a one-off project.

If You Ask Eleanor

“There is an editorial in “Common Sense” for this month, which I think will do a valuable service in stimulating thought and argument. It is entitled “Whose Sacrifice?” I am going to quote one thought here: “Sacrifice is indeed called for. But it is the sacrifice of the old methods of unplanned, competitive, monopoly profit-seeking business, and not the sacrifice of the bread and butter of the poor.”

– Eleanor Roosevelt, My Day (April 8, 1941)