Business advocacy groups are moving quickly to mount a legal challenge to the Federal Trade Commission’s (FTC) newly finalized rule banning nearly all types of noncompete clauses.
The U.S. Chamber of Commerce filed a lawsuit in the U.S. District Court for the Eastern District of Texas within hours of the FTC’s announcement on Tuesday, April 23. The lawsuit seeks an injunction from the rule going into effect and notes that the agency’s rule is not backed by any federal legislation. “Without such authorizing legislation, federal agencies have not previously sought to play a role in regulating noncompete agreements on a nationwide basis,” the lawsuit states.
The final rule effectively prohibits noncompete agreements between all businesses and their employees. Noncompetes are a common tool businesses use to protect trade secrets and competition. They are typically reserved for higher-skilled employees and often come with increased wages and benefits to compensate the employee.
The FTC claims that a blanket ban on noncompetes will lead to new businesses forming — 8,500 in the first year — and an estimated earnings increase for the average worker of $524 annually. The rule allows for existing noncompetes for senior executives to remain but prohibits employers from entering into or attempting to enforce any new noncompete agreements, even ones involving senior executives. Further, employers will be required to provide notice to workers, other than senior executives who are bound by an existing noncompete, that they will not be enforcing any such agreements.
Business groups, including the U.S. Chamber and the National Association of Wholesaler-Distributors (NAW), issued statements saying that the rule exceeded the FTC’s authority.
“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” said Suzanne Clark, U.S. Chamber president and CEO. “Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” she continued.
Brian Wild, chief government affairs officer for NAW, called the FTC rule a “misguided attempt to micromanage private contractual arrangements,” and said it would particularly affect wholesaler-distributors.