FTC Chair 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 sued the Federal Trade Commission in Texas federal court on Wednesday, alleging the commission voted to ban non-compete agreements, which are used to prevent workers from hiring for competitors in the same industry go to work.
On Tuesday, the FTC voted in favor of the ban, on the grounds that non-compete agreements hinder labor market efficiency, hinder competition and can lead to higher prices for consumers. Non-compete agreements often prevent employees from pursuing other jobs in their industry and the better pay these jobs would provide.
The ban will take effect 120 days after the rule is officially published in the Federal Register.
In the meantime, the business groups are trying to block the ban, claiming that the FTC does not have the authority to enforce the rule, and that the rule itself is too broad in scope.
“The sheer economic and political significance of a nationwide non-compete ban demonstrates that this is an issue for Congress, not an agency, to decide,” the U.S. Chamber, which represents about three million businesses, wrote in the lawsuit filed in the Eastern District of the United States. Texas.
The business groups claimed the FTC’s ban “violates 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 lawsuit.
They argue that non-compete agreements are essential for protecting internal trade secrets and proprietary information. The FTC suggested that instead of relying on non-compete agreements, companies should look to other safeguards for information, such as non-disclosure agreements.
The FTC rejected the claim that it exceeded its legal limits.
“Our legal authority is crystal clear,” FTC spokesperson Douglas Farrar told CNBC in a statement. “Tackling non-compete agreements that restrict Americans’ economic freedom is at the core of our mandate, and we look forward to winning in court.”
The commission estimates that approximately 30 million U.S. workers, or 18% of the U.S. workforce, are currently subject to non-compete agreements.
The ban would not only ban the use of future non-competitors, but it would also require companies to eliminate existing ones for all employees except some senior managers. The business groups claim that this latest provision has “inadmissible retroactive effect” by annulling previously agreed contracts.
“Companies that have negotiated non-competitors will lose the protections of those agreements – even if they have already complied,” the business groups wrote.
The business groups also argue that not all non-compete agreements are created equal, and that many of them “do not pose a threat to competition” in the broader market.
The House 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 responses, most of which the agency says were positive, although the Chamber claims the FTC did. does not address many of the criticisms of the business community.
The House’s legal threats over the past year have also been met with challenges on Capitol Hill, where there is bipartisan support for expanding current non-compete rules to an outright ban.