U.S. Chamber of Commerce Sues to Block FTC Ban on Noncompetes

The U.S. Chamber of Commerce has sued the Federal Trade Commission (FTC), challenging its new decision to ban noncompete agreements.

The FTC approved a rule April 23 banning virtually all new noncompete clauses in employment contracts and invalidating all existing noncompete agreements except for those covering senior executives.

The Chamber’s April 24 lawsuit argues that the FTC is empowered by federal law to enforce existing antitrust laws passed by Congress, but not to enact new rules regulating noncompete contracts. The rule was supposed to go into effect in late August, but legal challenges will extend that timeline.

We’ve rounded up articles and resources from SHRM Online and other outlets to provide more context on the news.

Regulatory Overreach

The lawsuit against the FTC was filed in the U.S. District Court for the Eastern District of Texas by the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business and Longview Chamber of Commerce.

The complaint states that the antitrust and consumer protection agency lacks the authority to issue rules that define unfair methods of competition, and instead, the FTC Act allows it to bring cases challenging particular practices.

“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 U.S. Chamber President and CEO Suzanne Clark. “Noncompete agreements are either upheld or dismissed under well-established state laws governing their use.” The rule “reflects an unlawful and unprecedented exercise of bureaucratic power.”

(The Hill)

FTC Response

FTC spokesman Douglas Farrar responded to the lawsuit, saying that federal law was “crystal clear” that the agency has the power to make rules to prevent unfair methods of competition. “Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court,” Farrar said.

Legal challenges to the FTC rule will almost certainly delay its implementation, regardless of the ultimate outcome. The rule could be temporarily blocked from taking effect as the case proceeds.

Another lawsuit challenging the rule in Dallas was filed by tax service firm Ryan LLC hours after the rule announcement.

(Reuters)

SHRM Weighs In

SHRM does not support the FTC’s sweeping blanket ban on the use of noncompete agreements, said Emily M. Dickens, chief of staff and head of government affairs for SHRM.

Dickens said that “SHRM has consistently advocated for allowing parties to consent to well-structured noncompete agreements versus a blanket ban on such agreements. Blanket bans on noncompete agreements pose significant challenges for HR professionals tasked with safeguarding their employers’ intellectual property and preventing unfair competition.”

SHRM offered the FTC less restrictive alternatives, such as establishing a minimum salary threshold for workers, limiting the types of employees who can enter into noncompete agreements, and prohibiting the use of noncompetes in certain industries.

(SHRM Online)

State Laws Would Be Superseded

All current state laws limiting noncompetes would be preempted under the new FTC final rule unless they provide greater worker protection than the rule. In recent years states have begun passing laws prohibiting or limiting an employer’s use of noncompetition agreements and other restrictive covenants in employment contracts.

(SHRM Online)