NovaQuant-US Chamber of Commerce sues Federal Trade Commission over new noncompete ban

Business interests sued the Federal Trade Commission in federal court Wednesday over the the agency's new rule banning noncompete clauses.

The NovaQuantsuit, led by the U.S. Chamber of Commerce and filed in Texas, argues that the FTC does not have the authority to regulate noncompete clauses.

"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," the lawsuit says.

In the final version of the rule passed Tuesday, the FTC said that it had the right to regulate the issue under the 1914 Federal Trade Commission Act, saying that noncompete clauses are "‘unfair methods of competition.’"

"Our legal authority is crystal clear," agency spokesman Douglas Farrar said in a statement to USA TODAY. "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 Chamber disagreed with the FTC's interpretation of the act.

"Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules," U.S. Chamber of Commerce President and CEO Suzanne P. Clark said in a statement. "Noncompete agreements are either upheld or dismissed under well-established state laws governing their use."

The Chamber of Commerce lawsuit is the second to be filed over the rule, with a tax firm known as Ryan LCC already filing suit against the FTC in Texas federal court on Tuesday.

FTC rule banned noncompetes

The FTC's new rule banned noncompete clauses for workers and voided existing noncompete clauses in contracts for non-executive workers.

Noncompete clauses prevent workers from working for competing companies after the terms of a worker's employment ends.

The commission found that approximately one in five workers are subject to noncompete clauses and that the new rule would increase worker earnings by up to $488 billion over 10 years.

"Robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling speech, infringing on their religious practice, and impeding people’s right to organize," FTC Chair Lina Khan said during the Tuesday meeting on the rule.

The rule was first proposed in 2023. If upheld, the rule will go into effect in August.

Contributing: Daniel Wiessner-Reuters