The US Chamber of Commerce, the nation's most prominent business group, sued on Wednesday to overturn a federal agency's near-complete prohibition on employers making workers sign contracts not to work for rivals or start similar businesses.
The Chamber's lawsuit, filed in federal court in Tyler, Texas, argues that the US Federal Trade Commission does not have the authority to implement broad regulations like the noncompete agreements ban announced on Tuesday and scheduled to start in August.
Noncompete Clauses' Implications
After the FTC's 3-2 vote, supported by the agency's majority Democratic commissioners, the Chamber stated that existing legal frameworks assess whether specific noncompete agreements should be upheld or invalidated. It argued that implementing such a broad ban would weaken the competitiveness of American businesses.
While the FTC is tasked with enforcing existing antitrust laws legislated by Congress, the Chamber said it does not have the mandate to create rules defining other forms of business conduct as anticompetitive.
The Chamber pointed out that companies would incur significant legal expenses as they use alternative methods to safeguard their investments. They also highlighted that the economy could suffer, with start-ups and small businesses finding it challenging to prevent larger firms from recruiting their top talent and obtaining confidential information.
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The Chamber's lawsuit comes after Ryan LLC's legal challenge to the FTC ruled in a separate federal court in Texas on Tuesday,
The FTC's Mission on Unfair Competition Practices
Effective in August, the rule prohibits all new noncompete agreements as unfair competitive practices. Existing noncompetes would be handled differently for senior executives, whom the FTC defines as those in policy-making positions earning over $151,164 annually. These executives could maintain their agreements. However, noncompetes for other workers would become unenforceable.
FTC spokesman Douglas Farrar asserted that federal law empowers the agency to establish rules to prevent unfair competition practices. Farrar emphasized that addressing noncompete agreements that limit Americans' economic freedom is central to the agency's mission and expressed confidence in prevailing in court.
The commission, along with Democrats and worker advocates backing the rule, argues that it is crucial to curb the growing prevalence of noncompete agreements, even in sectors like fast food and retail, where wages are lower. They contend that these agreements stifle wage growth by hindering workers from changing jobs easily.
On Tuesday, the FTC announced that prohibiting noncompete agreements could boost worker earnings by up to $488 billion over the next decade and stimulate the establishment of over 8,500 new businesses annually.
The US Chamber's Stance
US Chamber of Commerce CEO Suzanne Clark stated after the FTC's vote on Tuesday that banning employers' noncompete agreements across the economy is unlawful and will also undermine American businesses' ability to remain competitive.
Legal challenges to the commission's rule are likely to cause delays in its implementation, irrespective of the final decision, as noted by Matt Durham, a labor attorney at the firm Dorsey & Whitney in Salt Lake City, Utah.
The Chamber could seek an injunction temporarily halting the rule's enforcement while the case progresses, but it did not indicate whether it plans to do so in Wednesday's complaint.
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