The Federal Trade Commission (FTC) approved a rule on April 23, 2024 banning virtually all new noncompete clauses in employment contracts and invalidating existing noncompete agreements except for those covering certain senior executives.
Less than 24 hours later, the U.S. Chamber of Commerce, Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce filed a lawsuit against the FTC in the U.S. District Court for the Eastern District of Texas alleging that the consumer protection agency lacks the authority to issue rules that define unfair methods of competition, and instead, the FTC act only allows it to bring cases challenging particular practices. The Chamber’s complaint also contends that even if the FTC possessed such authority, the “noncompete rule would still be unlawful because noncompete agreements are not categorically unlawful under Section 5.” The lawsuit further argues that the rule is “impermissibly retroactive” and reflects an “arbitrary and capricious exercise” of the FTC’s power.
“The commission’s categorical ban on virtually all noncompete amounts to a vast overhaul of the national economy and applies to a host of contracts that could not harm competition in any way,” the complaint asserts. The lawsuit further states: “These agreements benefit employers and workers alike—the employer protects its workforce investments and sensitive information, and the worker benefits from increased training, access to more information, and an opportunity to bargain for higher pay.”
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“Although some members of Congress have recently taken an interest in the issue and proposed legislation that would establish national rules for noncompete agreements, those proposals have never received a committee vote, let alone a vote from either House of Congress. Without such authorizing legislation, federal agencies have not previously sought to play a role in regulating noncompete agreements on a nationwide basis,” the lawsuit adds.
The Chamber of Commerce is seeking an order “vacating and setting aside the noncompete rule in its entirety” and an order permanently enjoining the FTC from enforcing the rule. The plaintiffs are also seeking an order to delay the effective date and implementation of the noncompete ban until the conclusion of the case.
The new rule is slated to go into effect in 120 days, but legal challenges likely will extend that timeline.
This article originally appeared on Freeman Mathis & Gary, LLP.