Ever since the Federal Trade Commission (“FTC”) announced its Proposed Non-Compete Clause Rule last month, much ink has been spilled on what the rule means for employers, generally, but little guidance has been provided on how this rule, if it goes into effect, may impact employees in the financial services industry, where non-competes are a feature, not just a bug, of the terms of employment and compensation schemes that handcuff employees to their current firms.
This blog post[ZKC1] presents a series of answers to frequently asked questions by financial services employees who are trying to make sense of the FTC’s proposed rule and its impact on their current and future obligations.
What does the proposed rule require?
The proposed rule, if adopted as drafted, would ban all future post-employment non-competes and require employers to rescind all existing post-employment non-compete provisions by issuing a notice of rescission to each impacted employee.
Will the proposed rule apply to me?
It depends on where you work. The FTC’s rulemaking authority applies broadly to many types of employers, but it expressly does not apply to banks, savings and loan institutions or federal credit unions. The FTC’s authority does extend to bank subsidiaries, including, presumably, the broker-dealer subsidiaries of banks, as well as other non-banking institutions in the financial services industry, such as buy-side firms and fintech. Importantly, the rule extends beyond employees – it applies more broadly to all workers, including consultants and partners.
Will my garden leave provision still apply?
Notice periods and garden leave provisions are commonly used contract terms in offer letters with financial services employees that require these employees to give their employer a minimum period of notice prior to their resignation. Many employers will reserve the right to relieve the employee from their duties and cut them off from access to the employer’s premises, systems and clients during the notice period, which is commonly referred to “garden leave.” On their face, notice periods and garden leave obligations would still be permissible under the FTC’s proposed rule. The rule applies to post-employment non-competes, and not to periods during which the worker is technically still employed. That being said, the proposed rule will apply to those contractual commitments that serve as de facto non-compete clauses. Whether a notice period or garden leave provision would amount to a de facto non-compete will depend on the terms of the agreement, including the duration of the period and the activities and the compensation that the employee receives during such time.
Will the non-compete provisions in my deferred compensation or equity plan still apply?
Potentially no. The FTC’s commentary to the proposed rule indicates that non-compete clauses that are enforceable by payment of damages would be prohibited under the rule. Frequently used terms in compensation terms with financial services employees, including repayment obligations (or clawbacks) on already paid compensation if an employee goes to a competitor as well as deferred compensation that is forfeited if the employee works for a competitor. That being said, the rule has not precisely confirmed that these types of non-competes would be void. The FTC has, however, indicated that non-compete provisions that are enforceable through liquidated damages, including payment of a portion of fees derived from future competition, would be considered non-competes. While these types of provisions are most commonly used in the professional services industries, such as consultants or accountants, they are sometimes included in portfolio manager agreements for multi-strategy hedge funds.
Will my non-solicit or confidentiality obligations still apply?
Very likely, yes. The proposed rule expressly states that it does not apply to garden variety non-solicitation provisions or provisions prohibiting the disclosure of confidential information. However, if such restrictions are drafted to broadly that they would prohibit an individual from working for a competitor, then it could be considered a de facto non-compete in violation of the rule.
Will my existing non-compete be impacted?
Yes, the proposed rule would apply retroactively. However, if the non-compete is part of a larger agreement, it would still be applicable. So, for example, the non-compete in an offer letter may be rescinded but the employer would still be obligated to pay the guaranteed bonus to which it may be tied.
Is my non-compete unenforceable now?
The FTC’s proposed rule has not yet gone into effect, and it may be significantly altered by the rule-making process. Employees should continue to abide by their existing restrictions. However, your non-compete may be unenforceable under the laws of the state in which you reside and work or that govern the agreement. Many states have enacted legislation in the past 10 years that severely limit the use of non-competes. Further, non-competes have long been subject to judicial scrutiny. We suggest you consult with counsel to understand the scope of your contractual obligations and their enforceability. The attorneys in our Financial Services Practice Group are seasoned advisors on how to understand, navigate and challenge your existing restrictive covenants.
If I sign a non-compete now, will it be enforced against me?
It could be. As stated above, the proposed rule has not yet gone into effect, and it may be substantially altered. Employees should not sign onto non-compete agreements under the assumption that they will soon be unenforceable. If you have been asked to sign a non-compete agreement, we suggest you consult with counsel to understand its scope and enforceability, and to seek assistance in negotiating its terms.