Chamber of Commerce Challenges Non-Compete Ban

The U.S Chamber of Commerce brought a legal challenge to the Federal Trade Commission’s noncompete agreement ban on Wednesday in the District Court for the Eastern District of Texas just one day after the FTC passed the ban by a vote of 3-2. The lawsuit argues that the regulator exceeded its statutory authority and the rule should be vacated.

The rule makes all noncompete agreements unenforceable, including those already in effect. The only exception is that noncompetes already in effect for executives will be allowed to run their course, but cannot be renewed. The rule does not disturb non-solicitation agreements.

The Chamber argued in their complaint that the sections of the FTC Act that the FTC cited, Sections 5 and 6, do not grant the FTC general rulemaking authority. Instead, the Chamber argued that the FTC only has the authority to adjudicate certain disputes and has specific rulemaking authority related to specific statutes governing deceptive practices that harm consumers.

The complaint also noted that noncompetes are not categorically banned in any statute. Since this regulation will have widespread economic impact, it should fail the major questions doctrine, which is the legal principle that Congress does not delegate significant economic or political issues to executive agencies, the Chamber argued.

The Chamber added that the rule is bad policy on the merits. They argued that “noncompete agreements often promote competition,” and companies will invest less in training if they cannot contractually bind their employees and prevent them from seeking employment elsewhere.

The FTC argued that the rule would bring significant economic gains. These include higher wages for employees due to greater negotiating leverage that comes from having more flexibility to leave their current employer, and more business creation from employees leaving to create start-ups in the same industry.

The Chamber asked for the rule to be vacated, but did not request an emergency stay of the rule, which will come into effect 120 days after its entry in the Federal Register.