There has been a great deal of press about the Federal Trade Commission’s (FTC) vote to ban employee non-competition provisions and policies; see our firm’s fuller discussion here. While the FTC describes the rule as a comprehensive ban, it acknowledges that the rule does not apply to regulated financial institutions, and nonsolicitation clauses are still permitted.

Which entities are covered by the rule?

The noncompete ban applies only to entities covered by the FTC Act, and banks, savings and loan institutions, and credit unions are excluded from FTC jurisdiction. In other contexts, federal banking regulators are authorized by the Federal Deposit Insurance Act to enforce Section 5 of the FTC Act against banks. Historically, the federal banking regulators exercised this authority to apply the FTC Act’s prohibition of “unfair and deceptive acts or practices” (UDAPs), not “unfair methods of competition.” In the rulemaking, the FTC acknowledges that “whether [the federal banking regulators] apply the rule to entities under their own jurisdiction is a question for those agencies.” We believe it is unlikely that the federal banking regulators will attempt to apply the FTC’s noncompete ban on banks unless and until the lawsuits challenging the rule have been resolved in the FTC’s favor. Given the significant likelihood of a preliminary injunction while these challenges proceed, no quick action is likely required.

On the other hand, the FTC expressly declined to exclude bank holding companies, subsidiaries, and other affiliates of excluded financial institutions from the rule if those entities otherwise fall within the FTC’s jurisdiction. Thus, while banks and credit unions are currently excluded, their parent companies and affiliates are subject to the noncompete ban and the FTC’s enforcement. This an important consideration for banking organizations with shared or dual-hatted employees.

When does the ban go into effect?

The ban goes into effect 120 days after the final rule is published (approximately September 2024). Noncompete clauses for employees of covered companies that are in place before the effective date of the FTC’s rule become unenforceable unless the employee is a senior executive. In the case of senior executives, noncompete clauses in existence at the time the ban takes effect remain enforceable. If, however, that same senior executive enters into a new agreement after the rule’s effective date, the employer should assume that the new agreement may not include a noncompete obligation.

For purposes of the rule, the FTC established a two-prong test to determine which employees qualify as senior executives: (1) annual compensation of at least $151,164; and (2) a policy-making position. The annual compensation portion of the test is based on the annualized compensation for the preceding year and excludes payments for health insurance and similar payments. Similarly to Regulation O, the definition of “policy-making position” means president, chief executive officer, or the equivalent, or any other person who has “policy-making authority” for the business similar to that of an officer.” 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 advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary or affiliate of a common enterprise.

Does the ban cover nonsolicitation provisions?

The FTC specifically stated that nonsolicitation provisions “are generally not noncompete clauses under the final rule,” which means they are not banned. This is because “they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business.” The FTC, however, asserts that nonsolicitation agreements could, in some circumstances, be considered noncompetes “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” Whether a nonsolicitation provision has the practical effect of a noncompete is a “fact-specific inquiry” and likely to be uncommon.

For banks and other financial institutions, confidentiality and customer and employee nonsolicitation agreements are necessary to protect their valuable information, as well as customer and employee relationships. While employers will want to review existing agreements in light of the FTC’s new rule, nonsolication agreements will continue to be an important tool even for financial institutions subject to the ban on noncompete provisions.

What should banks do now?

Legal challenges to the FTC’s authority are already ongoing and there is a significant likelihood that the rule will not become effective or will be delayed. When combined with the uncertainty of when (and if) the federal banking regulators would enforce the FTC’s rule against banks, savings and loan institutions, and credit unions, it is very likely that no quick action is required. However, the FDIC recently proposed revisions to its policy on bank merger reviews, and in those materials, the FDIC indicated an interest in banning the use of noncompetes as part of merger transactions, based on the FDIC’s current view that noncompetes harm post-merger competitiveness. This FDIC commentary may indicate building skepticism of noncompetes within the federal banking regulators.

Banks, savings associations, and credit unions that operate one or more business lines through a holding company, subsidiary, or other affiliate may want to review those business lines and explore whether it makes sense to move, and the feasibility of moving, those business lines into the financial institution. Such an analysis will be extremely fact-dependent, will depend on the relevant employment arrangements, and will require evaluating the risks posed by the business line, the benefits of containing those risks in a separate legal entity, and the additional regulatory restrictions that may be triggered. We do not expect restructuring business lines to be a silver bullet, and we recommend a measured, deliberate approach until financial institutions have more clarity regarding how the FTC’s rule may be applied to them.

Troutman Pepper will continue to monitor the developments and progress concerning the FTC’s rule, the lawsuits challenging the ban, and its potential impact on employers and their operations.