On April 23, 2024, the Federal Trade Commission (FTC) voted to finalize its proposed rule, making it an unfair method of competition, and therefore a violation of the Federal Trade Commission Act (FTC Act), for any person to enter into a non-compete clause with a worker, attempt to enforce an existing non‑compete clause with a non-senior executive, or represent that a worker is subject to a non-compete clause on or after Sept. 4, 2024. The rule defines a “non-compete clause” as a term or condition of employment that prohibits, penalizes or “functions to prevent” a worker from seeking or accepting work with a different employer (for example, a competitor) or operating their own business. The only exceptions are non‑competes entered into with “senior executives” prior to the effective date of the rule, non-competes entered into by the seller as part of a bona fide sale of a business, and situations where a party is already seeking to enforce a non-compete clause before the effective date of the rule.
The non-compete ban only applies to entities covered by the FTC Act, and banks, savings and loan institutions, and credit unions are excluded from FTC jurisdiction. However, bank holding companies, their subsidiaries and other affiliates that are subject to FTC jurisdiction are subject to the non-compete ban. Because of this distinction, it is important to understand whether any existing non-compete agreements with employees are with the bank or its holding company and the status of the employee to determine if any existing non-compete agreements are enforceable. In addition, any future non-compete agreements with employees will need to be carefully crafted at the bank level.
Is the Non-Compete Agreement With the Bank or Holding Company?
The first fact that is important for determining whether a non-compete agreement is enforceable is whether the agreement is with the bank or a bank holding company. As noted previously, the FTC ban on non-compete clauses does not apply to banks. Under the FTC Act, banks, savings and loan institutions, and credit unions are explicitly excluded from the jurisdiction of the FTC and, therefore, are not subject to the ban. Although banks are exempt from the FTC’s jurisdiction, the federal banking agencies have the authority to enforce FTC regulations, pursuant to the Federal Deposit Insurance Act. The federal banking agencies have generally opted to enforce the FTC Act’s prohibition on “unfair and deceptive acts or practices” (UDAPs) and not “unfair methods of competition.” Because the FTC’s ban on non-compete clauses explicitly defines non-compete clauses as “unfair methods of competition,” it is unlikely that the federal banking agencies will enforce the ban on banks.
Notwithstanding the exclusion of banks from the FTC rule, the FTC expressly declined to exclude bank holding companies and their non-bank subsidiaries and affiliates from the rule. Because the non-compete ban only applies to holding companies and their non-bank affiliates, it is important to understand who the party is to the non‑compete agreement.
Is the Employee a Senior Executive?
The second fact in determining whether a non-compete agreement is enforceable is whether the employee meets the definition of a “senior executive” under the FTC rule. The FTC defines “senior executives” based on an earnings test and a job duties test. An executive must meet both tests to be determined a “senior executive.”
Under the earnings test, a “senior executive” must receive a total annual compensation of at least $151,164 in the preceding year. This amount is annualized if the executive was employed during only part of the preceding year.
Under the job duties test, an employee must be at the level of a president, chief executive officer, or their equivalent, or any other person who has a “policy-making authority” for the business. “Policy-making authority” means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advisory or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or an affiliate of a common enterprise. The definition of a “policy-making position” includes workers with the equivalent authority because job titles and specific duties vary between companies.
Timing of Non-Compete Agreement
With respect to bank holding companies and their non-bank subsidiaries, the FTC rule bans non-competes with all workers, including senior executives, entered into after Sept. 4, 2024. Only non-competes entered into with senior executives prior to Sept. 4, 2024, the effective date of the rule, may remain in force. Accordingly, any new agreements between bank holding companies with workers, even senior executives, after the effective date of the rule, may not include non-compete provisions.
Action Steps
Less than 24 hours after the FTC issued the ban on non-competes, the U.S. Chamber of Commerce and the Business Roundtable filed a lawsuit against the FTC in federal court in the Eastern District of Texas. A lawsuit was also filed by Ryan LLC, a global tax services firm, in federal court in the Northern District of Texas. A third lawsuit was filed by ATS Tree Services LLC, in federal court in the Eastern District of Pennsylvania. It is likely that many more lawsuits will be filed, and the FTC rule will be delayed or may not become effective. Bowles Rice LLP will monitor these and any other lawsuits challenging the ban.
While we wait for the outcome of the lawsuits challenging the bank, we recommend bank and bank holding companies review employment agreements with their employees to determine if any of those agreements contain non-competes that are subject to the ban and to determine if they fall within the exemption applicable to banks or the exemption applicable to existing agreements with senior officers. If any non-compete agreements are subject to the ban, the employer is prohibited from enforcing the non-compete and must provide notice to the workers (which includes former employees) by Sept. 4, 2024, that the non-compete will not be, and cannot legally be, enforced against the worker. The rule further provides the requirements regarding the form, content and delivery methods for this required notice.
The banking and financial services team and the employment law team at Bowles Rice LLP are available to assist you in determining whether any existing non-compete agreements are enforceable and your obligations in connection with the FTC non-compete ban.
Amy J. Tawney is a partner in the Charleston office of Bowles Rice LLP. She focuses her practice on banking law, mergers and acquisitions, securities law and regulatory matters. Contact Amy at (304) 347-1123 or atawney@bowlesrice.com.
