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The Legal Description > News > Chamber of Commerce sues FTC over final rule banning noncompete agreements

Chamber of Commerce sues FTC over final rule banning noncompete agreements

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Regulatory Updates
Wednesday, May 1, 2024

The U.S. Chamber of Commerce sued the Federal Trade Commission (FTC) to block the FTC’s final rule to ban employer noncompete agreements.

After the FTC announced the final rule, Chamber President and CEO Suzanne Clark stated, “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.  

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” she continued. “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.” 

The Chamber of Commerce was joined in filing the suit by the Business Roundtable, Texas Association of Business and Longview Chamber of Commerce.

They argued the rule violates the law in several ways. They first argued the FTC lacks the authority to issue regulations proscribing unfair methods of competition.

“Congress has never empowered the commission with general rulemaking authority regarding matters under its jurisdiction. On the contrary, Congress has carefully limited the commission’s authority to write regulations to a variety of specific contexts, and the commission has for decades respected those limits. Despite that history, the commission now claims that the ministerial authority provided by Section 6 of the FTC Act empowers it to issue any rule it deems necessary. The text, structure, and history of that provision confirm that it does not support the commission’s newfound assertion of regulatory power,” the complaint stated.

They argued that even if the FTC had the authority to issue regulations on the topic, the rule would still be unlawful because noncompete agreements are not categorically unlawful under Section 5.

“As Commissioner Wilson explained in dissent, the noncompete rule ‘represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry’ for noncompete agreements,” the complaint continued. “Noncompete agreements are widely used throughout the U.S. economy, and they have long been regulated (and routinely enforced) under state law — including at the time of the FTC Act’s passage and decades before. Although members of Congress have in recent years proposed legislation to regulate noncompete agreements at the federal level, those efforts have uniformly failed. Each of those facts cuts against the commission’s claim that all noncompetes constitute ‘unfair methods of competition.’ And here again, the sheer economic and political significance of a nationwide noncompete ban demonstrates that this is a question for Congress to decide, rather than an agency. If the Commission were right that Section 5 empowers the commission to declare an ordinary business practice unlawful notwithstanding the history, precedent, and economic evidence demonstrating the practice’s competitive benefits, then Section 5 would reflect a boundless and unconstitutional delegation of legislative power to the executive branch.”

They also argued the noncompete rule is impermissibly retroactive.

“If the noncompete rule goes into effect, parties that bargained for the protection afforded by a noncompete agreement will no longer be able to enforce those contracts going forward, even if they already upheld their obligations under the contract,” the complaint states. “In order to promulgate regulations with retroactive effect, administrative agencies are required to point to clear congressional authorization. Even if the FTC Act empowered the commission to issue substantive rules related to ‘unfair methods of competition,’ it clearly does not authorize retroactive rulemaking. And if the noncompete rule were permitted to authorize such an extreme step, it would raise serious doubts under the Fifth Amendment, which has long been understood to bar the federal government from retroactively disrupting settled legal rights.”

Lastly, they argued that the rule “reflects an arbitrary and capricious exercise” of the FTC’s powers.

“The commission offered no research to support such a categorical prohibition, instead relying on a series of studies that examined the economic effects of much narrower regulations and that suffered from a variety of limitations and flaws — all of which the commission ignored,” the complaint stated. “Moreover, the commission moved ahead with its across-the-board ban even though commenters offered a range of superior alternatives. The commission’s noncompete rule gave short shrift to these alternatives and failed to meaningfully engage with the arguments against its chosen policy. The commission also badly miscalculated the costs and benefits, conducting an ‘analysis’ that illustrated the pre-determined nature of its decision.

“In all of these ways, the commission’s noncompete rule reflects an unlawful and unprecedented exercise of bureaucratic power,” the complaint continued. “The commission has no authority to issue the rule, and even if it did, it has exercised that authority in a manner that flouts the fundamental requirements of the APA. As a result, this court should declare the noncompete rule unlawful and set it aside.” 

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