Bank Non-Competes are Still Okay, For Now

On April 23, the Federal Trade Commission (“FTC”) announced the text of its final rule that will ban most uses of non-compete agreements. Non-competes are agreements between an employer and individual that prevent the individual from taking employment in a similar industry within a certain geographic range for a defined period. The FTC rule aims to curtail use of these agreements, because of perceived overuse.

The rule is broad, and applies to most non-competes for employees and senior executives. The rule has some important carve outs. The new rule does not apply to agreements entered into before the effective date with senior executives. The rule also still allows non-compete agreements as part of a transaction involving the sale of a business or ownership of a business. The carve out for the sale of business interests is important, because buyers of companies or stock are reluctant to pay for a business if the original owner can walk across the street and start the same business over again.

The rule will go into effect at the end of the summer, unless a court intervenes to pause the rule.

The good news for banks is that the FTC does not have jurisdiction over banks. However, the non-compete rule may still apply to bank holding companies. Banks can still use non-compete agreements as a way of preventing employees from walking across the street to a competitor and taking valuable customer relationships with them.

However, this may not be the case forever. On March 21, 2024, the FDIC published proposed revisions to FDIC policy on merger reviews. In those comments, the FDIC indicated an interest in banning the use of non-compete agreements as part of merger transactions. The FDIC action is not a regulation, but will likely have the force of a regulation because the FDIC will apply it consistently when reviewing merger applications. The FDIC’s explanation is that non-competes harm post-merger competiveness:

[T]o promote the ongoing competitiveness of the divested business lines, branches, or portions thereof, the FDIC will generally require that the selling institution will neither enter into non-compete agreements with any employee of the divested entity nor enforce any existing non-compete agreements with any of those entities.

(emphasis added). While the FDIC’s action will be more limited than the FTC’s action, it will nevertheless have an impact on the value an acquiring institution may place on the acquired bank.

Banks should use the FTC action as an opportunity to review the measures they take to secure valuable, proprietary information. The Dickinson Bradshaw Employment and Labor Law Section recently published a blog that outlines possible solutions for employers interested in protecting their proprietary information.