On April 23, the Federal Trade Commission (FTC) approved a nationwide ban on new noncompete agreements on a 3-2 vote. Existing noncompete agreements will remain in force for senior executives once the rule goes into effect, but other existing noncompete agreements will not be enforceable for all other workers.
The U.S. Chamber of Commerce has already filed a lawsuit to block the rule from going into effect, stating that the rule is “unnecessary and unlawful.” Supporters of the rule argued that noncompete agreements “rob people of their economic liberty.”
How will the ban on noncompete agreements affect the financial services industry?
Per the FTC’s rule, noncompete agreements covering senior executives can remain in force after the rule goes into effect. The FTC defines senior executives as those individuals who:
- Are in a “policy-making position”
- Earn annual compensation of at least $151,164
In addition to the senior executive exception, there is also an exception allowing noncompete agreements entered into between the buyer and seller of a “bona fide sale” of a business. The rule defines a bona fide sale as “one that is made between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale.”
The final rule does not include any ownership threshold and sale-proceeds threshold, which is a significant expansion from the original proposed rule. Previously, the bona fide sale exception only applied to seller/worker who owned at least 25% of the business entity. While the agency broadened the rule, they do state that any such noncompete agreements will be subject to relevant state laws and federal antitrust laws.
For the financial services industry, it is important to note that non-solicitation agreements are not impacted by this ruling. The FTC explicit referenced non-solicits and approved of their continued existence by noting that they do not prevent an employee from accepting a job at another company.
Because non-solicit agreements are more common in the wealth management and the broader financial services space, the impact on the rule—assuming it survives legal challenges—may be, from a practical standpoint, limited in scope.
The Securities Industry and Financial Markets Association (SIFMA) publicly applauded the FTC’s carve out for business sales and existing agreements for senior executives, but otherwise expressed worry for the impact the rule will have on the industry.
“We, however, remain concerned that the near-categorical prohibition on non-compete clauses would hurt competition and the economy by terminating long-established practices of using non-compete clauses to protect a business’s sensitive information. The proposal also greatly underestimated its compliance costs, while failing to establish a clear record on its benefits or necessity.”
The rule is scheduled to go into effect in 120 days, notwithstanding legal challenges. In the meantime, financial businesses are reviewing the details of the report to identify workarounds that will allow firms to protect intellectual property and trade secrets in the event the rule goes into effect.
The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to analyze and litigate matters relating to restrictive covenants. Their work includes but is not limited to negotiating noncompete agreements and non-solicitation agreements contained in employment and independent contractor agreements.
If you are currently bound by a noncompete agreement or a non-solicitation agreement, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.
