New Lawsuit Targets FTC’s Noncompete Ban

Federal Trade Commission building | Image by LD/Getty Images

A new lawsuit filed by the U.S. Chamber of Commerce could reverse federal authorities’ decision to ban employers from requiring noncompete agreements in most contracts.

When the Federal Trade Commission (FTC) issued its final rule to ban noncompete clauses nationwide on Tuesday, the intention was that it would protect workers’ fundamental freedom to change jobs, increase innovation, and foster new business formation.

However, the U.S. Chamber of Commerce, the country’s largest business lobby, announced that same day that it would file a lawsuit to block the agency’s ruling. The Chamber filed a lawsuit on Wednesday.

According to a statement, the Chamber alleges that the FTC’s final ruling was “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,” said U.S. Chamber of Commerce president and CEO Suzanne Clark.

“Noncompete agreements are either upheld or dismissed under well-established state laws governing their use,” she said. “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.”

In response to the Chamber’s allegations, FTC spokesman Douglas Farrar said federal law was “crystal clear” about the agency’s power to prevent unfair methods of competition.

“Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court,” Farrar said in a statement, reported by CNBC.

According to FTC Chair Lina Khan, companies with noncompete clauses in their employment contracts stifle new ideas, suppress wage growth, and rob the American economy of dynamism. By banning noncompete clauses, Khan said the agency protects U.S. workers’ fundamental freedom to change jobs, increases innovation, and fosters new business formation.

“The FTC’s 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,” said Khan in a statement announcing the new rule.

Before finalizing its ruling, the FTC estimated that the ban would increase new business formation by 2.7% per year or about 8,500 additional new businesses annually. FTC estimates also point to workers’ wages climbing $524 annually and healthcare costs falling $194 billion over the next decade.

Lastly, the agency estimates that over 10,000 new patents will be filed annually over the next 10 years under the ruling.

Although the ruling carries some business-related benefits, the Chamber argues that the decision “sets a dangerous precedent for government micromanagement of business” and “can harm employers, workers, and our economy.”

“Companies will face substantial legal costs as they are forced to resort to other tools to attempt to protect their investments,” reads the Chambers’ lawsuit. “And the economy as a whole will suffer as start-ups and small businesses are unable to prevent dominant firms from hiring their best employees and gaining access to their confidential information.”

The final rule, approved by a 3-2 vote, will become effective 120 days after it is published in the Federal Register.

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