FTC faces legal backlash following noncompete rule

The regulator’s motion to restrict noncompete agreements has drawn an immediate reaction from business groups and financial industry stakeholders.

A wave of legal challenges is emerging against the Federal Trade Commission following its new regulation aimed at curbing noncompete agreements in the workplace.

Issued on Tuesday by the FTC, the rule restricts companies from enforcing existing noncompete clauses against anyone other than senior executives.

As reported by the Wall Street Journal, the FTC argued that this type of agreement, which often prevents employees from joining competing firms or starting similar businesses within a certain timeframe after leaving a company, affects one in five American workers.

The FTC argues that these clauses stifle labor competition and contribute to reduced wages and benefits.

Non-compete agreements have been a lightning rod of controversy at several wealth firms including Hightower, which is facing legal action from current and former advisors who argue its overbroad application of non-competes, among other tactics, hurt their efforts to start their own independent practices away from the firm

Leading the opposition, the U.S. Chamber of Commerce and national tax-services firm Ryan LLC filed lawsuits in federal courts in East Texas and Dallas, respectively. They were joined by other business groups, including the Business Roundtable, which represents CEOs of major U.S. employers.

Opponents to the rule contend that noncompete agreements are crucial for safeguarding intellectual property and maintaining customer relationships, and that the regulator’s rule opens the door for undue government overreach.

“If they can issue regulations with respect to unfair methods of competition, then there’s really no aspect of the U.S. economy they couldn’t regulate,” said Neil Bradley, head of strategic advocacy for the Chamber.

This controversy highlights a growing debate over the balance between protecting business interests and promoting fair labor practices. While some states have moved to ban these agreements entirely, others, like New York under Governor Kathy Hochul, have opted to maintain them for higher-compensated employees.

The FTC has been weighing a clampdown on noncompetes as early as January last year. That’s when the regulator issued a rule proposal to prevent employers from wielding those agreements to prohibit employees from joining rival firms, describing noncompetes as an “often exploitative practice.”

Reacting to the FTC’s proposal, Sifma told the regulator last year that noncompetes are a tool for brokerages and asset managers to protect themselves from rivals that would seek to scavenge trade secrets and other sensitive information.

The financial industry group warned that banks and credit unions are exempt from FTC regulation and would be able to keep using noncompetes, giving them an advantage over other financial firms subject to the restriction.