The U.S. Chamber of Commerce made good on its promise to sue the Federal Trade Commission over a ban on agreements that prevent workers from leaving one company for a rival, arguing in a lawsuit filed Wednesday that the agency overstepped its authority. .
The lawsuit, filed in U.S. District Court in Texas, argued that the FTC had no authority to issue rules defining illegal methods of competition. The Chamber of Commerce was joined by three other business groups: the Business Roundtable, the Texas Business Association and the Longview Chamber of Commerce.
The lawsuit came a day after the FTC announced a final rule to ban non-compete agreements. The rule passed in a 3-2 vote, with both Republican commissioners voting against the measure.
The Chamber of Commerce vowed to challenge the rule shortly after the vote. Their lawsuit called the ban “a major reform of the national economy and applies to a number of contracts that could not harm competition in any way.” He said the agency did not have the power to issue a ban and, even if it did, a categorical ban on such agreements was not legal.
Ryan LLC, a tax services firm in Dallas, also sued the FTC, raising broadly similar arguments in a lawsuit filed in another U.S. District Court in Texas. Ryan is represented by Eugene Scalia, a partner at Gibson Dunn who was Secretary of Labor during the Trump administration.
FTC spokesman Douglas Farrar said in a statement that Congress empowered the agency to prevent “methods of unfair competition,” which he believes include non-compete agreements.
“Our legal authority is very clear,” he said. “Addressing noncompetes that restrict Americans’ economic freedom is at the very core of our mandate, and we look forward to winning in court.”
The choice of forums for the lawsuits puts the challenges before Trump-appointed District Court judges, J. Campbell Barker in the Eastern District and Ada Brown in the Northern District. Any appeal would be sent to the Fifth Circuit Court of Appeals in New Orleans, where 12 of 17 judges were nominated by Republican presidents, six of them by Trump.
Debbie Berman, a managing attorney at Jenner & Block, said the two lawsuits filed in Texas were just the beginning. She said the question of the FTC’s authority to prohibit noncompetes would likely arise in every lawsuit involving such agreements in the future, and that various courts would likely reach different conclusions, making it timely for the Supreme Court to intervene. .
“This court has certainly signaled that it considers the agencies’ powers to be limited and closely aligned with the legislation from which they promulgate rules and regulations,” Ms. Berman said.
The FTC rule would void existing non-compete agreements, plus those that apply to executives in “policy-making positions” who earn at least $151,164 a year. It would also prevent companies from imposing new non-compete clauses, even on executives.
It is scheduled to become law 120 days after its publication in the Federal Register, probably this week, although it may be embroiled in a lengthy legal battle.
Companies generally use non-competes to protect trade secrets and avoid spending money training employees who may move to a competitor. The FTC and worker advocates say noncompete agreements suppress competition for labor, driving down wages.
The agency’s governance was supported by unions, including the AFL-CIO and the construction unions of North America. Business groups that opposed the rule included the Securities Industry and Financial Markets Association, a trade organization representing Wall Street, and the American Teamsters Associations.
Challenges to the rule center on whether the FTC has the power to make such sweeping decisions.
In its final rule, the agency said Congress empowered it to adopt rules “for the purpose of preventing methods of unfair competition” and “defining certain conduct as a method of unfair competition.”
The FTC has relied on a 1973 appeals court decision (National Association of Petroleum Refiners v. FTC) that allowed the agency to issue substantive rules. That case addressed the agency’s ability to require octane ratings to be posted at gasoline pumps.
William Kovacic, former FTC chairman, said the agency could face an uphill battle fending off challenges to its noncompete rule.
“The FTC believes that prior case law and legislation have created a bridge over which it can pass its non-compete rule,” Kovacic said. “The danger for the commission and its rule is that the bridge is fragile and the FTC wants to drive a very heavy truck over it.”
The attempts to block the FTC’s noncompete rule come amid a broader backlash by some companies, lawmakers and others against the power of executive agencies.
The Supreme Court is expected to rule in June on a case that seeks a much stricter interpretation of the powers granted to federal agencies. That case, like those against the FTC, seeks to limit the agencies’ power to those explicitly granted by Congress.
Companies including SpaceX, Trader Joe’s and Amazon have filed lawsuits arguing that the National Labor Relations Board, which regulates labor relations, is unconstitutional.
Neil Bradley, policy director for the Chamber of Commerce, said such challenges are a “reasonable reaction” to federal agencies that have tried to expand their authorities.
“It’s that kind of regulatory overreach in micromanagement and the new precedents that agencies are trying to set, that is fueling a lot of the concern in the business community,” he said.
Laura Padin, an attorney with the National Employment Law Project, said a sympathetic Supreme Court had “encouraged” companies to raise more challenges to agency power. By arguing that all regulation must be explicitly mandated by Congress, which often stalls legislation, Business groups are essentially asking not to be subject to new demands, he said.
“What we’ve seen is this resurgence of corporations challenging the basic authority of administrative agencies to perform their basic tasks,” Ms. Padin said.