Last week, the Federal Trade Commission (FTC) finalized a rule prohibiting noncompete agreements, except those with senior executives. Legal action ensued as the U.S. Chamber of Commerce and other business groups filed a lawsuit challenging the rule in a U.S. District Court in Texas. Let’s get into the details.
Background
After a 15-month review period, the FTC approved the Noncompete Rule by a 3-2 vote. This rule retroactively invalidates existing noncompete agreements and bars employers from entering new ones.
A noncompete is a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. A ‘worker’ is anyone from the CEO of a company to its mail room, and the term includes independent contractors.”
Pros and Cons of the Noncompete Rule
Supporters argue the rule will boost job creation, raise wages, and enhance competition. President Biden praised the move, emphasizing workers’ rights. Unions and workers’ advocate groups support the rule, citing studies that show noncompete agreements suppress wages by preventing people from switching jobs and receiving higher pay.
Opponents of the rule fear economic disruption and argue noncompete agreements safeguard investments and promote workforce stability. They claim the FTC lacks authority to engage in “rulemaking of substantive competition rules” and that the Noncompete Rule is an “impermissible delegation of legislative authority,” violating “constitutional law principals of statutory interpretation.”
What’s in the Complaint
The Chamber of Commerce contends that the FTC overstepped its authority in issuing the rule, seeking declaratory judgment and injunctive relief against its enforcement. The complaint alleged that the FTC is empowered “only to develop internal rules to govern how it conducts investigations and carries out its functions, not to promulgate substantive rules that bind private parties and declare common business practices categorically unlawful.”
Plaintiffs additionally requested an order vacating and setting aside the Noncompete Rule, an order permanently enjoining the FTC from enforcing the rule against Plaintiffs’ members, an order delaying the effective date and implementation of the rule pending the conclusion of the case, an order awarding attorneys’ fees, and finally, any other relief as the Court “deems just and equitable.”
Broader Implications for Federal Agencies and Courts
Noncompete agreements are typically regulated through state laws. Critics of the Noncompete Rule argue that it gives the FTC unilateral authoritative power to regulate legitimate business decisions traditionally governed by the states. The Chamber of Commerce claims to be “fighting back against government micromanagement” and stopping what they believe to be “an astonishing power grab by the FTC.” In contrast, the FTC’s chair, Lina M. Khan, stated that the “final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”
Debbie Berman, a management-side lawyer at Jenner & Block, said, “The question of the FTC’s authority to ban noncompete would probably come up in every lawsuit pertaining to such agreements going forward, and various courts were likely to reach different conclusions, making it ripe for the Supreme Court to weigh in.” Ultimately, it will be up to the courts to determine the validity of the Noncompete Rule and the extent of the FTC’s authority over business contracts.
Is the noncompete ban necessary for fair competition, or does it exceed FTC authority?
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News & Article Sources:
https://www.nytimes.com/2024/04/24/business/lawsuit-ftc-noncompete-ban.html
https://www.nytimes.com/2024/04/23/business/noncompete-clause-ban.html
https://www.uschamber.com/cases/antitrust-and-competition-law/chamber-v-ftc
