Following the Federal Trade Commission’s (FTC’s) adoption of its Rule on April 23, 2024, that struck down almost all forms of noncompete agreements (the Rule), unsurprisingly and as we predicted in our last piece discussing the adoption of the Rule, the United States Chamber of Commerce (Chamber) has commenced an action in the U.S. District Court for the Eastern District of Texas that seeks, among other things, (1) a declaration that the FTC’s Noncompete Rule is arbitrary, capricious or otherwise contrary to law within the meaning of the Administrative Procedure Act and (2) an order permanently enjoining the FTC from enforcing the Rule against its members.

The Chamber alleges in its complaint that “the economy as a whole will suffer” because dominant firms snatch the best employees from startups and small businesses. The Chamber argues that the FTC’s Rule is an assertion of power that is contrary to centuries of state and federal law and relies on “novel claims of authority.”

The Rule deems essentially all noncompete agreements between paid staff, independent contractors and unpaid workers to be an unfair method of competition and thus unenforceable and that it requires all employers to notify current and former employees that existing agreements are no longer being enforced with a limited exception to preexisting noncompetes for employees considered to be “senior executives.” However, that exception is inapplicable to noncompetes provided to “senior executives” moving forward.

A Question of Authority
The Chamber argues that Congress never gave the FTC general rulemaking authority and instead has limited the Commission's authority to writing regulations in specific contexts. The Chamber expressed that FTC’s Rule rests on novel claims of authority referring to section 5 of the FTC Act pertaining to barring unfair methods of competition and the agency’s 2022 guidance that sought to take a more-expansive approach to the provision.

The Chamber’s suit also alleges that FTC relies on section 6(g) of the FTC Act, a provision that has not been used to regulate private individuals for more than five decades. The Chamber believes that section only provides FTC with authority to develop internal rules to govern how it conducts investigations, “not to promulgate substantive rules that bind private parties and declare common business practices categorically unlawful.”

The Chamber also raised an issue with the retroactive effect of the Rule and its impact on existing contracts, explaining that the "categorical ban on virtually all noncompetes amounts to a vast overhaul of the national economy, and applies to a host of contracts that could not harm competition in any way." The Chamber’s lawsuit is at least the second suit filed since the FTC’s Rule. A separate suit was commenced by a tax services company, Ryan LLC, in Texas federal court, alleging the ban represents a dramatic overreach of the FTC's rulemaking authority.

Summary
We anticipate that there will be several suits challenging the Rule, which will likely lead to a delay in the effective date. However, companies should be proactively reviewing their employment agreements, in particular, their noncompete agreements with employees, as there is little question this Rule may end up changing the way employers use these agreements. In the meantime, we will continually monitor for updates and remain at your service to advise on the potential impact of the Rule.