(Bloomberg) — The U.S. Federal Trade Commission voted Tuesday to adopt a near-total ban on non-compete provisions that prohibit workers from switching jobs within an industry, a rule the Chamber of Commerce vowed to immediately challenge in court.
The high-stakes legal battle comes three years after President Joseph Biden signed an executive order encouraging the FTC to crack down on non-compete agreements, which affect roughly one in five Americans.
“Depriving people of their economic freedom also robs them of all kinds of other freedoms,” Speaker Lina Khan said Tuesday. Arguing that the FTC lacks “regulatory authority requires ignoring the most literal reading of the law.”
“We have to respect what the courts have said over what the courts may say in the future,” she added.
The antitrust and consumer protection agency voted 3-2 to issue a final rule Tuesday after a nearly hour-long debate in an open meeting of the FTC's five commissioners. The proposal would ban most new non-compete agreements, including those of senior executives.
Existing non-competes for executives earning more than $151,164 a year in a “policy-making position” may remain in place.
Existing noncompetes with lower-level workers would become unenforceable after the rule goes into effect in six months. The agency estimated it would increase US income by at least $400 billion over the next 10 years. The rule will not apply to employees of non-profit entities or franchises.
The Chamber of Commerce, the nation's largest business lobby, earlier told reporters it plans to sue over the rule as soon as Wednesday.
Union support
The FTC originally proposed a non-compete ban in January 2023, arguing that the restrictions unfairly block workers from changing jobs and undermine labor competition. The proposal has the support of labor organizations AFL-CIO and the Service Employees International Union, Democratic senators and attorneys general from California, Illinois and 17 other states. Of the 26,000 public comments the FTC received about the proposal, the agency said 25,000 were in support of a ban.
Read more: The FTC proposes a ban on non-compete agreements for employees
But business groups oppose the ban, arguing that it is overly broad and limits companies' ability to protect confidential information.
Tuesday's vote fell along partisan lines with the FTC's three Democrats in favor and the agency's Republicans opposed. Melissa Holyoak, the former Utah attorney general who joined the agency last month, said she opposed the rule because there was “no clear congressional authorization” for the FTC to issue it. Republican Andrew Ferguson also voted against the rule, saying he was sympathetic to the policy in the rule but did not believe the courts would uphold the FTC's rulemaking authority.
“The administrative state cannot legislate because Congress refuses to do so,” Ferguson said.
In a call with reporters Monday, House policy chief Neil Bradley said the FTC does not have the authority to issue the rule.
'Micromanaging' Economics
The rule “opens up a Pandora's box where this commission or future commissions can micromanage every aspect of the economy,” Bradley said. “Agencies cannot exercise authority that Congress has not given them. Congress has not given the FTC the ability to write regulations about competition.”
Agency Democrats, however, assert that the FTC has authority to issue rules defining unfair methods of competition. The final rule also rejected the idea that the agency lacks the authority to issue the rule because it represents a “major question,” citing a 1973 case that upheld the agency's rulemaking authority.
The Supreme Court's conservative majority has shown deep skepticism about what it sees as agency overreach. In a 2022 case involving efforts to curb greenhouse gas emissions from power plants, a sharply divided court said regulators must have clear authorization from Congress before acting on “major issues.”
The last time the FTC issued a stand-alone rule defining an unfair method of competition was in 1968, known as the Tailored Clothing Rule for Men and Boys. The rule, repealed in 1994, required apparel companies to offer equal treatment in promotions to all sellers. The agency has issued dozens of other rules that rely on both the competition authority's unfair methods and its ability to detect unfair or deceptive practices.
“The FTC has some good arguments as to why this is not a major question, but a topic that fits well within its authority,” said Sandeep Vaheesan, an attorney with the Open Markets Institute advocacy group that filed the original petition for a ban. non-compete. in 2019. “If this is not a restraint of trade, what is?”