The United States Chamber of Commerce and other trade groups sued the Federal Trade Commission in the United States District Court for the Eastern District of Texas on April 24, in Chamber Of Commerce Of The United States Of America et al v. Federal Trade Commission et al, Case No. 6:24cv148. The Chamber seeks to invalidate the FTC’s ban on post-employment noncompete agreements and provisions.

The plaintiffs put forth several arguments for why the FTC’s rule should be overturned:

Lack of Authority/Major Questions Doctrine. The plaintiffs argue that the FTC lacks the authority to issue a ban on noncompetes under the major questions doctrine. Specifically, because this is such a significant issue, Congress must have clearly delegated authority to the FTC to issue this type of ban and Congress did not do so.

The plaintiffs argue:

First, the Commission lacks the authority to issue regulations proscribing “unfair methods of competition.” Congress has never empowered the Commission with general rulemaking authority regarding matters under its jurisdiction. On the contrary, Congress has carefully limited the Commission’s authority to write regulations to a variety of specific contexts, and the Commission has for decades respected those limits. Despite that history, the Commission now claims that the ministerial authority provided by Section 6 of the FTC Act empowers it to issue any rule it deems necessary. The text, structure, and history of that provision confirm that it does not support the Commission’s newfound assertion of regulatory power

If there were any doubt about the Commission’s authority under Section 6, it is resolved by the major-questions doctrine. The Supreme Court has repeatedly invoked that doctrine in recent years to reject similar attempts by administrative agencies to take unprecedented actions with vast economic and political significance based on nothing more  than ambiguous and ancillary statutory text—particularly where the agency has never before pointed to that text as a font of regulatory power.

Non-Competes Are Not Categorically Unlawful. The plaintiffs argue that noncompete agreements are not categorically unlawful under Section 5 of the Federal Trade Commission Act, and the FTC’s final rule is a departure from prior precedent, which involved a fact-specific inquiry about individual noncompete agreements.

The plaintiffs argue:

Second, even if the Commission had any authority to issue substantive regulations proscribing “unfair methods of competition,” the Noncompete Rule would still be unlawful because noncompete agreements are not categorically unlawful under Section 5. As Commissioner Wilson explained in dissent, the Noncompete Rule “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry” for noncompete agreements. 88 Fed. Reg. at 3540 (Wilson Dissent). Noncompete agreements are widely used throughout the U.S. economy, and they have long been regulated (and routinely enforced) under state law—including at the time of the FTC Act’s passage and decades before. Although Members of Congress have in recent years proposed legislation to regulate noncompete agreements at the federal level, those efforts have uniformly failed. Each of those facts cuts against the Commission’s claim that all noncompetes constitute “unfair methods of competition.” And here again, the sheer economic and political significance of a nationwide noncompete ban demonstrates that this is a question for Congress to decide, rather than an agency. If the Commission were right that Section 5 empowers the Commission to declare an ordinary business practice unlawful notwithstanding the history, precedent, and economic evidence demonstrating the practice’s competitive benefits, then Section 5 would reflect a boundless and unconstitutional delegation of legislative power to the Executive Branch.

The Final Rule Is Impermissibly Retroactive. The plaintiffs also argue that the final rule is impermissibly retroactive, in that it bars enforcement of noncompete agreements entered into before the effective date of the final rule.

The plaintiffs argue:

Third, the Noncompete Rule is impermissibly retroactive. If the Noncompete Rule goes into effect, parties that bargained for the protection afforded by a noncompete agreement will no longer be able to enforce those contracts going forward, even if they already upheld their obligations under the contract. In order to promulgate regulations with retroactive effect, administrative agencies are required to point to clear congressional authorization. Even if the FTC Act empowered the Commission to issue substantive rules related to “unfair methods of competition,” it clearly does not authorize retroactive rulemaking. And if the Noncompete Rule were permitted to authorize such an extreme step, it would raise serious doubts under the Fifth Amendment, which has long been understood to bar the federal government from retroactively disrupting settled legal rights.

The Final Rule is Arbitrary and Capricious. Finally, the plaintiffs argue the noncompete ban is arbitrary and capricious because the FTC ignored the research and alternatives proposed by the comments submitted in response to the FTC’s proposed rule.

The plaintiffs argue:

Fourth and finally, the Noncompete Rule reflects an arbitrary and capricious exercise of the Commission’s powers. The Commission’s 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 Commission offered no research to support such a categorical prohibition, instead relying on a series of studies that examined the economic effects of much narrower regulations and that suffered from a variety of limitations and flaws—all of which the Commission ignored. Moreover, the Commission moved ahead with its across-the-board ban even though commenters offered a range of superior alternatives. The Commission’s Noncompete Rule gave short shrift to these alternatives and failed to meaningfully engage with the arguments against its chosen policy. The Commission also badly miscalculated the costs and benefits, conducting an “analysis” that illustrated the pre-determined nature of its decision.

Plaintiffs seek a judgment that the FTC’s rule is arbitrary, capricious, or otherwise contrary to law; as well as an order that vacates the final rule, and an order that permanently enjoins the FTC from enforcing the final rule against the plaintiffs’ members.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for ‎your situation, you should contact an attorney.