US ban on worker noncompetes faces uphill legal battle

By Daniel Wiessner

(Reuters) -The U.S. Federal Trade Commission’s ban on “noncompete” agreements commonly signed by workers is likely vulnerable to legal challenges, experts said, as some courts have grown increasingly skeptical of federal agencies’ power to adopt broad rules.

The commission in unveiling the rule on Tuesday said agreements not to join employers’ competitors or launch rival businesses suppress workers’ wages and stunt their mobility and job opportunities. About 30 million people, or 20% of U.S. workers, have signed noncompetes, the agency said.

Business groups led by the U.S. Chamber of Commerce, tax services firm Ryan LLC, and a Pennsylvania tree trimming company have already filed three lawsuits claiming that the FTC, which enforces antitrust laws, lacks the power to determine which business practices amount to unfair competition and should be banned.

The Chamber late Wednesday moved to block the rule from taking effect pending the outcome of its lawsuit.

Those challenges are likely to delay implementation of the rule, which is set to take effect in August. In the end they may doom the measure, as the FTC has staked out a novel and unprecedented position regarding its rulemaking powers, several lawyers and other experts said.

The FTC rule may also be invalid because it addresses a “major question” with broad implications for the U.S. economy, which the U.S. Supreme Court has said agencies can only undertake with explicit authorization from Congress, lawyers said.

The FTC lacks that authority, and Congress itself has declined to pass proposed bans on noncompetes, said Jeremy Merkelson, a partner at law firm Davis Wright Tremaine in Washington, D.C. who represents employers.

“I think the Supreme Court has all it needs to rule that the FTC’s big swing was not greenlit by the legislative branch,” Merkelson said.

The commission will also have to contend with a battery of conservative judges who have shown a willingness to block major government policies and rein in the power of federal agencies, including the Supreme Court’s conservative supermajority.

The Tyler, Texas court where the Chamber filed its lawsuit has been “a pretty effective firewall against questionable Biden administration rulemaking,” said Gregory Hoff, director of labor and employment policy at the business-backed HR Policy Association.

The court’s lone judge, J. Campbell Barker, is an appointee of Republican former President Donald Trump. Ryan’s lawsuit has been assigned to another Trump appointee, U.S. District Judge Ada Brown in Dallas. And any appeals in those cases will be heard by the New Orleans-based 5th U.S. Circuit Court of Appeals, where 12 of the 17 judges were appointed by Republican presidents.

The FTC in a statement responding to the lawsuits on Wednesday said federal law is “crystal clear” that the agency has broad rulemaking powers to address anticompetitive conduct.

The commission also defended that authority in the 570-page rule itself, relying heavily on U.S. appeals courts decisions from 1973 and 1985 that upheld agency rules requiring fuel distributors to determine the “octane rating” of gasoline and mail order companies to ship products within advertised time frames.

But those rules were not as sweeping as the noncompete ban that touches every sector of the economy, and the 5th Circuit is not bound to follow prior rulings from other appeals courts, said Damian Cavaleri, a New York-based lawyer who has represented employers and workers.

“It’s likely the 5th Circuit will create a split and it will go up to the Supreme Court, and I wouldn’t expect (the court’s conservative majority) to shy away from addressing the issue,” he said.

(Reporting by Daniel Wiessner in Albany, New York; Editing by David Bario, Chizu Nomiyama and Daniel Wallis)

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