Business groups sue to stop FTC from banning noncompete clauses

April 24, 2024

The U.S. Chamber of Commerce fulfilled its promise to sue the Federal Trade Commission over a ban on agreements that prevent workers from leaving a company for a rival—arguing in a lawsuit filed on Wednesday, April 24, that the agency overstepped its authority, reports The New York Times.

The lawsuit, filed in a U.S. District Court in Texas, argued that the FTC did not have authority to issue rules that define unlawful methods of competition. The Chamber of Commerce was joined by three other business groups: the Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce.

The suit came a day after the FTC announced a final rule to ban the noncompete agreements. The rule was approved in a 3-to-2 vote, with both Republican commissioners voting against the measure.

The Chamber of Commerce vowed to challenge the rule shortly after the vote. Its lawsuit called the ban “a vast overhaul of the national economy, and applies to a host of contracts that could not harm competition in any way.” The Chamber said the agency didn’t have the power to issue a ban and, even if it did, a categorical ban on such agreements wasn’t lawful.

The FTC’s rule would void existing noncompete agreements, besides those applying to executives in “policy-making positions” who make at least $151,164 a year. It would also prevent companies from imposing new noncompetes, even on executives.

It is set to become law 120 days after it is published in the Federal Register, probably this week, though it may be tied up in a long legal battle.

Companies generally use noncompetes to protect trade secrets and to avoid spending money to train employees who can hop over to a competitor. The FTC and worker advocates say that noncompete agreements suppress competition for labor, pushing down wages.

In its final rule, the agency said the law empowered it to adopt rules “for the purpose of preventing unfair methods of competition” and “defining certain conduct as an unfair method of competition.”

It leaned on a 1973 appellate court decisionNational Petroleum Refiners Association v. FTC— that allowed the agency to issue substantive rules. That case addressed the agency’s ability to require octane ratings be posted on gas pumps.

William Kovacic, a former FTC chair, said the agency might face an uphill battle in the challenge over its rule.

“The FTC believes that earlier jurisprudence and legislation has created a bridge over which its noncompete rule can travel,” Kovacic said. “The hazard for the commission and its rule is that the bridge is fragile, and the FTC wants to drive a very heavy truck over it.”

Research contact: @nytimes