Business Groups Sue to Stop F.T.C. From Banning Noncompete Clauses

The U.S. Chamber of Commerce fulfilled its promise to sue the Federal Trade Commission over a ban on agreements that prevent workers from leaving a company for a rival, arguing in a lawsuit filed Wednesday that the agency overstepped its authority.

The lawsuit, filed in a U.S. District Court in Texas, argued that the F.T.C. did not have authority to issue rules that define unlawful methods of competition. The Chamber of Commerce was joined by three other business groups: the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce.

The suit came a day after the F.T.C. announced a final rule to ban the noncompete agreements. The rule was approved in a 3-to-2 vote, with both Republican commissioners voting against the measure.

The Chamber of Commerce vowed to challenge the rule shortly after the vote. Its lawsuit called the ban “a vast overhaul of the national economy, and applies to a host of contracts that could not harm competition in any way.” It said the agency didn’t have the power to issue a ban and, even if it did, a categorical ban on such agreements wasn’t lawful.

Ryan LLC, a tax services firm in Dallas, also sued the F.T.C., generally raising 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.

Douglas Farrar, an F.T.C. spokesman, said in a statement that Congress empowered the agency to prevent “unfair methods of competition,” which it believes includes noncompete agreements.

“Our legal authority is crystal clear,” he said. “Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court.”

The choice of forums for the lawsuits puts the challenges in front of 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, with six by Mr. Trump.

Debbie Berman, a management-side lawyer at Jenner & Block, said the two lawsuits filed in Texas were just the beginning. She said the question of the F.T.C.’s authority to ban noncompetes 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.

“This court has certainly signaled that it views agencies’ powers to be narrow and very tightly hewed to the legislation that they’re promulgating rules and regulations from,” Ms. Berman said.

The F.T.C.’s rule would void existing noncompete agreements, besides those applying to executives in “policy-making positions” who make at least $151,164 a year. It would also prevent companies from imposing new noncompetes, even on executives.

It is set to become law 120 days after it is published in the Federal Register, probably this week, though it may be tied up in a long legal battle.

Companies generally use noncompetes to protect trade secrets and to avoid spending money to train employees who can hop over to a competitor. The F.T.C. and worker advocates say that noncompete agreements suppress competition for labor, pushing down wages.

The agency’s rule was supported by unions, including the A.F.L.-C.I.O. and North America’s Building Trades Unions. Business groups opposing the rule included the Securities Industry and Financial Markets Association, a trade organization that represents Wall Street, and the American Trucking Associations.

The challenges to the rule center on whether the F.T.C. 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 unfair methods of competition” and “defining certain conduct as an unfair method of competition.”

The F.T.C. has leaned on a 1973 appellate court decision — National Petroleum Refiners Association v. F.T.C. — that allowed the agency to issue substantive rules. That case addressed the agency’s ability to require octane ratings be posted on gas pumps.

William Kovacic, a former F.T.C. chair, said the agency might face an uphill battle fending off the challenges to its rule on noncompetes.

“The F.T.C. believes that earlier jurisprudence and legislation has created a bridge over which its noncompete rule can travel,” Mr. Kovacic said. “The hazard for the commission and its rule is that the bridge is fragile, and the F.T.C. wants to drive a very heavy truck over it.”

The attempts to block the F.T.C.’s noncompete rule come amid a broader pushback by some businesses, lawmakers and others against the power of executive agencies.

The Supreme Court is expected to decide by June on a case seeking a much more narrow interpretation of the powers federal agencies are granted. That case, like the ones against the F.T.C., seek 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, the chief policy officer at the Chamber of Commerce, said those kinds of challenges are a “reasonable reaction” to federal agencies that have sought to expand their authorities.

“It’s that kind of regulatory overreach into micromanagement, and the new precedents that agencies are trying to set, that’s fueling a lot of the concern in the business community,” he said.

Laura Padin, a lawyer at the National Employment Law Project, said a sympathetic Supreme Court had “emboldened” businesses to bring more challenges to agencies’ power. By arguing that every regulation should be explicitly ordered by Congress, which often deadlocks on legislation, business groups are essentially asking not to be subject any new requirements, she said.

“What we’ve seen is this resurgence of corporations challenging the basic authority of administrative agencies to do their basic tasks,” Ms. Padin said.

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