The Federal Trade Commission has flexed its muscles, and now companies are fighting back.
A federal judge in Texas on Tuesday blocked the FTC's controversial ban on non-compete agreements that was set to take effect in early September after being challenged by the U.S. Chamber of Commerce and tax services provider Ryan LLC.
“This decision is a major victory for the Chamber in its fight against government micromanagement of business decisions,” Chamber CEO Suzanne Clark said in a statement.
The move came a day after grocer Kroger (KR) filed a lawsuit in Ohio federal court alleging that the FTC violated the U.S. Constitution by relying on an in-house administrative law judge to block Kroger's merger with rival supermarket chain Albertsons (ACI).
“We are asking the court to stop the FTC's unlawful lawsuit in its internal courts,” Kroger Chairman and CEO Rodney McMullen said in a statement.
The new challenges to the scope of the FTC's authority follow a period of aggressive enforcement action by the FTC under Chairman Lina Khan as the Biden administration seeks to rein in what it sees as anticompetitive conduct across a number of industries, from health care to groceries to technology.
Federal Trade Commission Chairman Lina Khan. (Photo by Kevin Dietsch/Getty Images) (Kevin Dietsch via Getty Images)
A recent Supreme Court ruling in June has made it easier for companies to bring such legal action.
First, in SEC v. Jarques, the Supreme Court stripped the Securities and Exchange Commission of its power to use its internal courts to impose monetary penalties for civil violations and deprived defendants of the right to a jury trial.
Kroger cited the ruling in its complaint with the FTC on Monday.
In another case, titled Loper Bright Enterprises v. Raimondo, the Supreme Court also overturned a 40-year-old doctrine known as “Chevron deference,” which had given federal agencies latitude in interpreting the law and limited regulators' power to intervene in many industries.
Judge Ada Brown of the U.S. District Court in Dallas cited the Roper Bright decision when she ruled to block the FTC's non-compete order, noted Gregory Brown, a transactional litigation shareholder at the law firm Hill Ward Henderson.
“Even without Loper Bright, the (Texas) court would likely have reached the same conclusion regarding the FTC's rules,” Brown said, “but the FTC and other agencies will need to proceed carefully in this new environment.”
FTC Court
The proposed combination between Kroger and Albertsons faces two separate merger lawsuits from the FTC: one in the U.S. District Court for the District of Oregon and one in the FTC's Internal Administrative Court.
The story continues
The FTC is asking a federal court to block the deal while its own judges review it.
But in its new filing, Kroger argues that the agency's judges cannot be removed by the U.S. president and therefore lack the authority to challenge the merger.
They also argue that the private right of companies to enter into contracts with other private parties can only be challenged by an independent judicial body.
Kroger CEO Rodney McMullen. Photo by Patrick T. Fallon/AFP via Getty Images (Patrick T. Fallon via Getty Images)
Kroger's complaint says the FTC has “clearly violated the Constitution.”
“We stand ready to defend the merger in the upcoming trial in federal court, the appropriate forum for this matter,” CEO McMullen said in a statement.
Non-competition clauses
Companies also oppose the FTC's decision to ban nearly all non-compete agreements, a significant shift in U.S. law that could reshape the balance of power between companies and workers.
The ban, which is set to take effect in early September, has been called into question in several lawsuits filed by companies in Texas, Florida and Pennsylvania.
On Tuesday, Judge Ada Brown of the U.S. District Court in Dallas agreed with arguments from the U.S. Chamber of Commerce and tax services company Ryan LLC, saying the commission lacked the authority to enforce the ban.
The ruling means the dispute could be reviewed by the U.S. Supreme Court.
FTC rules define a non-compete clause as an agreement that specifically prohibits an employee from seeking or accepting other work or starting a business after their employment ends.
The rule was written to apply to U.S. employees and independent contractors in all industries, from doctors and engineers to fast-food workers and salespeople, and it was applied retroactively, with some exceptions.
The Federal Trade Commission Building in Washington. (AP Photo/Alex Brandon, File) (AP)
The exceptions are non-compete employment agreements already in place with a company's CEO, president, and other senior executives with “policy-making” authority. The rule does not apply to employees whose compensation exceeds $151,164 per year.
When announcing the rules, the FTC said they were “necessary to protect workers' fundamental freedom to change jobs, spur innovation, and encourage the creation of new businesses.”
However, a Texas judge stated, “The FTC lacks legal authority to promulgate non-compete rules, and the rules are arbitrary and capricious. Accordingly, the FTC's promulgation of the rules is an unlawful government act.”
“The FTC's blanket ban on non-compete agreements is an illegal expansion of power that puts American workers, businesses and the American economy at a competitive disadvantage,” Clark Chamber of Commerce CEO said in a statement.
U.S. Chamber of Commerce CEO Suzanne Clark in 2022. (Photo by Patrick T. Fallon/AFP via Getty Images) (Patrick T. Fallon via Getty Images)
The FTC said it plans to appeal, and noted that the ruling does not prevent the agency from addressing non-compete clauses through individual enforcement actions.
“We are disappointed in Judge Brown's decision and will continue to fight to stop non-compete clauses that limit the economic freedom of hard-working Americans, stifle economic growth, restrict innovation and depress wages,” the spokesman said.
As of now, the FTC rules won’t go into effect until September 4th, so non-compete agreements will be governed primarily by state law.
The outcome of the presidential election in November could also influence how this situation unfolds.
“If the White House changes party, the Trump administration could change leadership at the FTC and the FTC could decide to repeal this rule,” Brown said.
“In that situation, the Supreme Court may not need to rule on it.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis at Yahoo Finance. Alexis Weed.
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