The U.S. Chamber of Commerce and several other other business groups sued the Federal Trade Commission in federal court in Texas on Wednesday over the commission's decision to ban noncompete agreements designed to forestall employees from joining competitors in the identical industry.
On Tuesday, the FTC voted to pass the ban on the grounds that non-compete clauses can reduce the efficiency of the labor market, hinder competition and result in higher prices for consumers. Non-compete agreements often prevent employees from taking other jobs of their industry and forestall those jobs from offering higher pay.
The ban is scheduled to take effect 120 days after the rule is officially published within the Federal Register.
Meanwhile, business groups try to dam the ban, saying the FTC doesn't have the authority to implement the rule and that the rule itself is just too broad.
“The sheer economic and political significance of a nationwide non-compete agreement shows that this is a matter for Congress to decide, not an agency,” the chamber, which represents about 3 million firms, wrote within the newspaper legal motion filed within the Eastern District of Texas.
The business groups claimed that the FTC's ban “violates centuries of state and federal laws.” In addition to the Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce are also plaintiffs within the lawsuit.
They claim that non-compete agreements are essential to protecting internal company secrets and confidential information. The FTC suggested that firms should look to other information protections, equivalent to non-disclosure agreements, as a substitute of non-compete clauses.
The FTC rejected the accusation that it had exceeded its legal limits.
“Our legal authority is crystal clear,” FTC spokesman Douglas Farrar told CNBC in an announcement. “Fighting non-compete agreements that restrict Americans’ economic freedom is at the heart of our mandate, and we look forward to winning in court.”
The Commission estimates that roughly 30 million U.S. employees, or 18% of the American workforce, are currently subject to non-compete agreements.
The ban wouldn’t only prohibit using future non-compete agreements, but would also require firms to eliminate existing non-compete agreements for all employees except some executives. The business groups argue that this latter provision is “inadmissibly retroactive” because it invalidates previously agreed contracts.
“Companies that have negotiated non-compete agreements will lose the protections of those agreements – even if they have already held up their end of the bargain,” the business groups wrote.
The business groups also claim that not all non-compete clauses are created equal and lots of “do not pose a threat to competition” within the broader market.
The U.S. Chamber has threatened to sue the FTC over this rule for the reason that commission first proposed it in January 2023. Since then, the FTC has received about 26,000 comments, most of which were positive, based on the agency, although the chamber claims that the FTC didn’t address most of the firms' criticisms.
The Chamber's legal threats last 12 months were also met with opposition on Capitol Hill, where there may be bipartisan support for expanding current non-compete provisions right into a total ban.
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