The US Chamber of Commerce and other business groups have filed a lawsuit against the Federal Trade Commission (FTC) in an attempt to block the FTC’s newly issued ban on noncompete clauses. The lawsuit was filed in the US District Court for the Eastern District of Texas and seeks a court order that would vacate the rule in its entirety.

The FTC issued the rule banning noncompete clauses on April 24, 2024, determining that such clauses are an unfair method of competition and thus a violation of Section 5 of the FTC Act. The rule is scheduled to take effect in about four months and would render the vast majority of existing noncompetes unenforceable. The only existing noncompetes that won’t be nullified are those for senior executives, defined as people earning more than $151,164 a year and who are in policymaking positions.

The Chamber of Commerce argues that the FTC overstepped its authority by issuing the ban. The lawsuit claims that the FTC’s assertion of power is “novel” and breaks with centuries of state and federal law. The Chamber also argues that the ban will force businesses to turn to inadequate and expensive alternatives to protect their confidential information, such as nondisclosure agreements and trade-secret lawsuits.

The FTC, on the other hand, maintains that it has the authority to impose the ban using its power under sections 5 and 6(g) of the FTC Act. The agency’s spokesperson stated that “Our legal authority is crystal clear. In the FTC Act, Congress specifically ’empowered and directed’ the FTC to prevent ‘unfair methods of competition’ and to ‘make rules and regulations for the purposes of carrying out the provisions of’ the FTC Act.”

The lawsuit highlights the ongoing debate over noncompete clauses, with some arguing that they are necessary to protect businesses from unfair competition and others claiming that they stifle innovation and limit economic freedom. The FTC’s ban is seen as a significant move in the latter camp, as it seeks to address concerns that noncompetes can keep wages low, suppress new ideas, and rob the American economy of dynamism.

The case is likely to be closely watched by businesses and advocacy groups on both sides of the issue. If the US District Court in Texas grants an injunction blocking the ban, the FTC could challenge the ruling in a federal appeals court. The outcome of the lawsuit could have significant implications for the use of noncompete clauses in the US and the balance of power between businesses and workers.