The Noncompete Agreements NOT Affected by the FTC Ban

Not All Noncompetes Are Equal in the Eyes of the FTC

Right now, the FTC ban on the use of noncompete clauses/agreements is set to take effect in early September. As of the Friday before Memorial Day, there are two lawsuits challenging the ruling in federal courts, one in Texas (two challenges were filed in Texas, a judge recently stayed one of them).

Uncertainty rules the day . . . for the most part. What was somewhat lost in the announcement of the ban and the many and varied reactions to it was this: some noncompetes will not be affected by the ban at all.

The Senior Executive Exception

Existing noncompetes with senior-level executives are not covered by the FTC’s ban. On the surface, this seems like a relatively simple rule: senior executives are employees earning more than $151,164/year who are in a “policy-making position.”

There are, however, two immediate problems.

First, what’s included in the $151,164 figure? The FTC doesn’t directly specify it, but they do somewhat lay out what’s not included: there are two categories of employer-employee noncompetes that are not covered (and thus not banned) by the rule.

The FTC conducted a webinar last week and stated that the $151,164 figure does not include board, lodging, payments for medical insurance, payments for life insurance, contributions to retirement plans, and “other similar fringe benefits.”

While “other similar fringe benefits” is remarkably and troublingly vague, it should be noted that the Final Rule “itself only cites provisions that comprehensively define board and lodging.”

It is, then, a work in progress.

The definition of a “policy-making position” is, as you might expect, similarly murky.

The FTC states that a policy-maker “includes a firm's president, chief executive officer or the equivalent, any other officer with policy-making authority, and any other natural person with policy-making authority similar to that of an officer's.”

“Any other” and “similar” are basic ingredients to future lawsuits.

The FTC goes on to define “policy-making authority” as the "final authority to make policy decisions that control significant aspects of a business entity or common enterprise" but 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 of or affiliate of a common enterprise."

The FTC also advises that employees may be considered senior executives if they “have been making decisions that have a significant impact on the business as a whole.”

Add “significant” to the litigation recipe.

Again, the FTC's May 14 does specify who is not a ‘senior executive’ – “executives of a division or some other kind of sub-part of the whole business.”

The Business Sale Exception

There is also a relatively narrow exception for the use of noncompete agreements in some business sales.
This exception applies to noncompete agreements entered into when there's a bona fide sale of:

The exception is an acknowledgement that in “a genuine business sale, the buyer has a legitimate interest in protecting the acquired company's value, including its customer base and goodwill.”

A noncompete under these circumstances prevents the seller from immediately competing with the buyer.

With all the controversies surrounding the FTC's ban, we will continue to follow this issue closely.