Groups sue to block FTC’s new rule barring noncompete agreements

The U.S. Chamber of Commerce and other business groups on Wednesday sued the Federal Trade Commission over a new rule that would make most noncompete agreements illegal, setting up a potential showdown over the scope of the agency’s authority.

The lawsuit, filed in federal court in the Eastern District of Texas, comes a day after the FTC voted 3-2 to issue a rule that bans noncompete agreements, which restrict workers from switching employers within their industry. The agency estimates that 30 million workers are bound by the agreements, and proponents of the ban say it will raise wages, bolster innovation, foster new businesses and reduce health care costs.

But the chamber contends in its lawsuit that the agency lacks the authority to issue such a sweeping and consequential rule, and it is asking the court to overturn it. The chamber has opposed the rule since it was proposed 16 months ago, arguing that it would hurt businesses’ ability to protect proprietary information and reduce their incentive to invest in workers to prevent them from jumping to a rival employer.

“The Commission’s astounding assertion of power breaks with centuries of state and federal law and rests on novel claims of authority by the Commission,” the lawsuit states.

The FTC defended its stance on Wednesday, asserting that its rulemaking authority is “crystal clear.”

“This authority has repeatedly been upheld by courts and reaffirmed by Congress,” said agency spokesman Douglas Farrar. “Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court.”

The suit comes as the power of federal agencies faces intense legal scrutiny, with the Supreme Court in recent years inclined to limit the scope of the administrative state. The court is set to decide two cases that experts say could bear directly on the lawsuit against the FTC because they deal with the scope of agency power and whether courts can defer to agencies’ interpretation of the laws they administer.

Crucially, the justices in 2022 introduced the “major-questions doctrine” in curtailing the Environmental Protection Agency’s ability to reduce carbon emissions at power plants. The doctrine holds that an agency must have clear congressional authorization before it takes action of major economic and political significance. The high court similarly reined in the Centers for Disease Control and Prevention in ending its moratorium on evictions, as well as the Occupational Safety and Health Administration’s far-reaching vaccine requirement.

“We have a Supreme Court that has a majority that’s looking skeptically at the exercise of governing power by administrative agencies like the Federal Trade Commission,” said Cary Coglianese, a law professor at the University of Pennsylvania, adding that he would not be surprised if a lower court struck down the FTC’s noncompete rule and the case landed before the Supreme Court.

The chamber’s lawsuit alleges that the noncompete rule would not survive scrutiny under the major-questions doctrine. It also alleges that the FTC has misinterpreted its authority in considering noncompete agreements “unfair methods of competition.”

The business groups further argue that the rule would unlawfully disrupt existing agreements between employees and employers. And they contend that it is not supported by sufficient evidence and that the agency did not consider alternatives.

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” Suzanne P. Clark, the chamber’s CEO, said in a statement Wednesday.

FTC Chair Lina M. Khan rejected such arguments during a commission meeting Tuesday before the rule passed, arguing that noncompete agreements count as “unfair methods of competition” under the Federal Trade Commission Act.

“To my mind, arguing that the FTC lacks this authority requires ignoring the most straightforward reading of the text,” she said, adding that a large body of case law supports the agency’s interpretation.

The FTC rule was first proposed in January 2023, with backers highlighting research that showed noncompete agreements suppress wages, stifle entrepreneurship, create frictions in the job market – and are widespread even among low- and middle-income earners in a range of professions, including hairstylists, janitors and ballroom dancers.

The ban on noncompete agreements would take effect in about four months unless the courts block it. The rule would prohibit employers from entering into noncompete agreements with workers and effectively invalidate existing noncompetes for all workers except for senior executives, who compose less than 1 percent of the workforce, according to the FTC.