FTC Chairwoman Lina Khan testifies during a budget hearing of the House Energy and Commerce Subcommittee on Innovation, Data, and Commerce, April 18, 2023.
Tom Williams | Cq-roll Call, Inc. | Getty Images
The U.S. Chamber of Commerce and several other business groups on Wednesday sued the Federal Trade Commission in Texas federal court over the commission’s vote to ban noncompete clauses, which are used to block employees from leaving to work for competitors in the same industry.
On Tuesday, the FTC voted to enact the ban on the basis that noncompete clauses stifle the efficiency of the labor market, hinder competition and can lead to higher prices for consumers. Noncompete agreements often prevent workers from pursuing other jobs in their industry, and the better pay those jobs would offer.
The ban is set to take effect 120 days after the rule is officially entered into the Federal Register.
In the meantime, the business groups are seeking to block the ban, claiming the FTC does not have the authority to implement the rule, and the rule itself is too wide in scope.
“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,” the U.S. Chamber, which represents roughly three million companies, wrote in the lawsuit filed in the Eastern District of Texas.
The business groups claimed that the FTC’s ban, “breaks with centuries of state and federal law.” In addition to the Chamber of Commerce, the Business Roundtable, Texas Association of Business and Longview Chamber of Commerce are all plaintiffs in the suit.
They allege that noncompete agreements are essential to protecting internal company secrets and proprietary information. The FTC suggested that instead of relying on noncompete clauses, companies should look to other safeguards of information, like non-disclosure agreements.
The FTC rejected the allegation that it is overstepping its legal bounds.
“Our legal authority is crystal clear,” FTC spokesperson Douglas Farrar told CNBC in a statement. “Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court.”
The Commission estimates that around 30 million U.S. employees, or 18% of the American workforce, are currently subject to a noncompete clause.
The ban would not only prohibit the use of any future noncompetes but it would also require companies to scrap existing ones for all workers, except some senior executives. The business groups argue that this latter provision is “impermissibly retroactive,” by voiding previously agreed-upon contracts.
“Businesses that bargained for noncompetes will lose the protections of those agreements—even if they already held up their end of the bargain,” the business groups wrote.
The business groups also maintain that not all noncompete clauses are created equal, and many “pose no threat to competition” in the broader market.
The U.S. Chamber has been threatening to sue the FTC over this rule since the Commission first proposed it in January 2023. Since then, the FTC has received about 26,000 comments, most of which the agency said were positive, though the Chamber claims that the FTC did not address many of the criticisms fielded by businesses.
The Chamber’s legal threats over the past year also ran up against challenges on Capitol Hill, where there is bipartisan support for expanding current noncompete regulations into a full ban.