In a move that could lead to a significant legal showdown, the U.S. Chamber of Commerce and other business groups have filed a lawsuit against the Federal Trade Commission (FTC) over a new rule that would render most noncompete agreements illegal. The lawsuit, submitted in a federal court for the Eastern District of Texas, comes on the heels of a recent 3-2 vote by the FTC to implement a ban on noncompete agreements, which restrict employees from changing jobs within their industry.

The FTC estimates that around 30 million workers are currently tied to noncompete agreements. Proponents of the new rule argue that its implementation would result in higher wages, foster innovation, encourage entrepreneurship, and ultimately reduce healthcare costs. However, the U.S. Chamber of Commerce firmly opposes the rule, asserting that the FTC lacks the authority to enact such a far-reaching and consequential regulation. The chamber contends that the ban on noncompete agreements would hamper businesses' ability to protect proprietary information and reduce their incentives to invest in employees who may quickly move to rival companies.

Describing the FTC's assertion of power as groundbreaking and contrary to established state and federal laws, the chamber's lawsuit requests the court to overturn the rule. It has been a steadfast opponent of the rule since it was first proposed 16 months ago.

In response, the FTC defended its actions, asserting that its authority to issue the noncompete rule is clear and has been repeatedly upheld by courts and reaffirmed by Congress. According to Douglas Farrar, an FTC spokesman, addressing noncompete agreements that limit economic freedom is a fundamental aspect of the agency's mandate, with hopes that their stance will prevail in court.

This legal battle unfolds against the backdrop of increased scrutiny over the power of federal agencies. The Supreme Court has recently shown a propensity to limit the scope of the administrative state, and it is set to rule on two cases that are expected to impact the outcome of the FTC lawsuit. These cases deal with the extent of agency power and the courts' ability to defer to administrative agencies' interpretations of the laws they administer. The introduction of the "major-questions doctrine" by the justices, which requires clear congressional authorization for significant actions, has already curtailed the powers of agencies like the Environmental Protection Agency and the Centers for Disease Control and Prevention.

Legal experts predict that this FTC lawsuit may eventually reach the Supreme Court, given the current skepticism exhibited by the majority of the court towards the exercise of governing power by administrative agencies.

The U.S. Chamber of Commerce's lawsuit alleges that the noncompete rule would not withstand scrutiny under the major-questions doctrine. It further claims that the agency has misinterpreted its authority by deeming noncompete agreements as "unfair methods of competition." The business groups also argue that the new rule would unlawfully disrupt existing agreements between employers and employees and assert that the FTC rule lacks sufficient evidence and consideration of alternatives.

The FTC's noncompete rule was first proposed in January 2023, with research highlighting its potential to suppress wages and inhibit entrepreneurship across a range of professions, even among low- and middle-income earners such as hairstylists, janitors, and ballroom dancers. Unless blocked by courts, the ban on noncompete agreements is set to take effect in approximately four months. It would explicitly prohibit employers from entering into such agreements with their workers, effectively invalidating existing noncompete agreements for all but senior executives, who comprise less than 1 percent of the workforce, according to the FTC.