Are Non-Competes on the Ropes?

Banks have traditionally used non-compete agreements to protect themselves when executives and key managers quit and go to work for a competitor with the benefit of specialized training, proprietary methods and/or trade secrets taken from the prior employer. Non-compete agreements are valid in most states as long as the employer has a protectable business interest, and the competitive restriction is reasonable in terms of geographic and temporal scope. Typically, non-competes are easier to enforce the higher the level of employee.

Non-competes have come under fire recently from multiple governmental agencies. The top attorney for the National Labor Relations Board (NLRB) has declared that most non-compete agreements violate labor laws by barring workers from opportunities to seek new jobs. The May 30, 2023, memo from NLRB General Counsel Jennifer Abruzzo urges the NLRB to adopt the standard for which she first argued in Stericycle, Inc. Abruzzo states that non-compete provisions “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting access to other employment opportunities” and chill protected activities under Section 7 of the National Labor Relations Act.

If the NLRB adopts the standard stated in Stericycle, Inc., a non-compete provision will violate Section 8(a)(1) “if it reasonably tends to chill employees in the exercise of Section 7 rights unless it is narrowly tailored to address special circumstances justifying the infringement on employee rights.” While memoranda from the NRLB general counsel do not constitute binding law, they present theories the general counsel will use to prosecute cases at the NLRB. Now that this memorandum has been issued, all NLRB regional offices must submit cases concerning non-compete provisions to the NLRB Division of Advice. This memorandum will therefore lead to more scrutiny involving any non-compete provision in employment or labor contracts.

There are several important considerations here. First, Section 7 rights under the National Labor Relations Act apply in all employment settings, unionized and union-free. Second, supervisors are not included in the definition of employees under that Act. So, even if the NLRB ultimately takes action toward non-compete agreements, it should not affect agreements with supervisors, key managers or executives. Finally, the actions of the NLRB tend to vary, depending on the political party in power. The outcome of the 2024 presidential election is likely to influence the effect of Abruzzo’s memo, as well as its effect on the banking industry altogether.

The Federal Trade Commission (FTC) has also proposed a rule to broadly ban all non-compete agreements, including agreements employers utilize with high-level executives and agreements entered into as part of a merger or acquisition. The FTC has exhausted a large amount of resources since it was instructed to curtail “unfair” non-compete clauses by President Joe Biden’s 2021 Executive Order.

Are non-compete agreements on the ropes? Perhaps. Is it time to panic? Not necessarily. Implementation of some version of the FTC’s rule is not necessarily imminent. The public comment period recently closed and tens of thousands of comments were received. These referenced such themes as the fundamental principle of freedom to contract, the importance of protecting intellectual property and the possibility the proposed rule will de-incentivize employer investment in specialized employee training.

Before the FTC can enforce the rule, it must publish a final version in the Federal Register. There is no set deadline for this to occur. It is believed that publication will not happen this calendar year, with some news reports stating the vote will not take place until April of 2024. Once published, the final rule will go into effect 60 days later and banks would be required to be compliant within 180 days. There is no question, however, that legal challenges will be launched as soon the rule is published, which will delay final implementation even further. The U.S. Chamber of Commerce, for example, has already alleged in its public comment that the FTC does not have the authority to issue such a broad-sweeping rule.

What should banks do in the meantime? There’s no need to abandon the use of non-competes just yet. Instead, banks should:

• Continue to monitor the situation, including any actions of the NLRB and the inevitable legal battle over the FTC rule.
• Make sure you have a firm grasp on your current inventory of non-compete agreements, including those with former employees.
• Consider adding or strengthening other types of agreements, including non-solicitation, confidentiality and non-disclosure agreements.

Going forward, developments over the next few years will determine if non-competes continue to be routine practice in employment agreements, are only used sparingly for niche situations or are banned altogether.