With the demise of the doctrine of Chevron deference at the U.S. Supreme Court in the Loper Bright Enterprises case, the future of the Federal Trade Commission’s broad rule banning noncompete agreements nationwide is uncertain.
Although the Noncompete Rule1 has an effective date of September 4, 2024, a federal court in Texas expects to decide, by July 3, 2024, whether to stay the Rule’s enforcement, which will lead to an appellate fight before the Fifth Circuit Court of Appeals.2
If the Rule is not stayed, employers need to be ready to comply with its prohibitions and understand its important exceptions. One of the Rule’s key exceptions carves out its application to “senior executives” with existing non-compete agreements.
The Noncompete Rule
The Noncompete Rule will make it an “unfair method of competition” under Section 5 of the FTC Act “(i) [t]o enter into or attempt to enter into a non-compete clause; (ii) [t]o enforce or attempt to enforce a non-compete clause; or (iii) [t]o represent that [a] worker is subject to a non-compete clause.”3
A non-compete clause is any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) [s]eeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) [o]perating a business in the United States after the conclusion of the employment that includes the term or condition.”4
If not subject to an exception, an employer must “provide clear and conspicuous notice to the worker . . . that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker” by the effective date of September 4, 2024.5
There are several narrow exceptions that permit noncompetes in the context of: (i) a bona fide sale of a business; (ii) a franchisor-franchisee agreement (for franchisees themselves, though not their employees); and (iii) for “senior executives.”6
The Senior Executive Exception
Who qualifies as “senior executive” under the Rule against whom pre-existing noncompetes will remain enforceable?
To qualify as a “senior executive,” an employee must (i) receive $151,164 in total annual compensation from the employer and (ii) be in a policy-making position.
Total annual compensation includes “salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation,” but not “board, lodging and other facilities” or “payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other similar fringe benefits.”7
With respect to policy-making, a “business entity’s president, chief executive officer or the equivalent” is, per se, in a “policy-making position.”8
In addition, an “officer,” defined as a “president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer” or anyone “routinely performing corresponding functions” to those roles, may be in a policy-making position, but only if the officer has “policy-making authority.”9
Who is an Officer?
The Noncompete Rule states that its definition of “officer” is “nearly verbatim of the SEC definition of ‘officer’ in 17 CFR 240.3b-2,” the definition used in the Securities Exchange Act, and that it “adopts the SEC’s definition.”10
Courts interpreting the SEC’s “officer” definition have emphasized that, “[w]hile an individual’s title is relevant” to whether the individual is an “officer,” courts must also inquire whether the individual fulfills “executive responsibilities traditionally associated with corporate officers.”11
Particularly for individuals who do not hold one of the titles listed in the Rule—president, vice president, secretary, etc.—employers should examine the applicable job responsibilities to determine whether an employee is “routinely performing corresponding functions” to those of the listed titles.12 In the Securities Exchange Act context, for example, courts have extended officer status beyond the titles listed in 17 C.F.R. § 240.3b-2 to “de facto officer[s].”13
Who has Policy-Making Authority?
Although the Rule’s definition of “policy-making authority” lacks a direct analogue in the Securities Exchange Act, the Rule provides guidance on what constitutes “policy-making authority,” i.e., “authority to make policy decisions that control significant aspects of a business entity or common enterprise . . . .”14
First, “policy-making authority” specifically excludes merely “advising or exerting influence over . . . policy decisions” or “having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”15 The Rule states that “many executives in what is often called the ‘C-Suite’ will likely be ‘senior executives’ if they are making decisions that have a significant impact on the business, such as important policies that affect most or all of the business,” while those with a less direct influence on business-wide policy will not.16 This principle extends to partnerships, where “[p]artners in a business, such as physician partners of an independent physician practice, would also generally qualify as ‘senior executives’ . . . , assuming the partners have authority to make policy decisions about the business.”17
Second, the Rule states that “policy-making authority is assessed based on the business as a whole, not a particular office, department, or other sublevel.”18 By way of examples, the Rule provides:
[I]f the head of a marketing division in a manufacturing firm only makes policy decisions for the marketing division, and those decisions do not control significant aspects of the business (which would likely be decisions that impact the business outside the marketing division), that worker would not be considered a “senior executive.” Similarly, in the medical context, neither the head of a hospital’s surgery practice nor a physician who runs an internal medical practice that is part of a hospital system would be “senior executives,” assuming they are decision-makers only for their particular division.19
In addition, “[w]orkers who head a subsidiary or affiliate of a common enterprise are similar to department heads; the “senior executives” controlling the entire common enterprise control those individual subsidiaries and affiliates.”20 Accordingly, “[f]or example, if a business operates in several States and its operations in each State are organized as their own corporation, assuming these businesses and the parent company meet the criteria for a common enterprise, the head of each State corporation would not be a “senior executive.”21 In short, only a limited subset of corporate officers are likely to have policy-making authority under the Rule.
Conclusion
Assuming the Noncompete Rule takes effect just after Labor Day in 2024, employers need to assess whether existing noncompete agreements with their “senior executives” can remain enforceable. Confirming compensation exceeds the $151,164 threshold will be simpler than determining that a company officer with significant responsibility in a company or firm has policy-making authority under the Rule. As a result, it will be a summer to analyze contracts and executive roles at organizations nationwide.
1 Non-Compete Clause Rule, 89 Fed. Reg. 38342 (May 7, 2024) (to be codified at 16 C.F.R. pts. 910, 912).
2 Ryan LLC v. FTC, No. 3:24-cv-00986 (N.D. Tex.).
3 89 Fed. Reg. at 38502–03 (to be codified at 16 C.F.R. § 920.2(a)(1)).
4 89 Fed. Reg. at 38502 (to be codified at 16 C.F.R. § 910.1).
5 89 Fed. Reg. at 38503 (to be codified at 16 C.F.R. § 910.2(b)(1)).
6 See 89 Fed. Reg. at 38502 (to be codified at 16 C.F.R. § 910.1); 89 Fed. Reg. at 38504 (to be codified at 16 C.F.R. § 910.3(a)); 89 Fed. Reg. at 38503 (to be codified at 16 C.F.R. § 910.2(a)(2)).
7 89 Fed. Reg. at 38502 (to be codified at 16 C.F.R. § 910.1).
8 Id.
9 Id.
10 89 Fed. Reg. at 38418.
11 SEC v. Brown, 740 F.Supp. 2d 148, 161 (D.D.C. 2010) (cleaned up).
12 See 89 Fed. Reg. at 38502 (to be codified at 16 C.F.R. § 910.1).
13 See SEC v. Brown, 740 F.Supp. 2d at 161; SEC v. Gallagher, No. CIV. A. 87-3904, 1989 WL 95252, at *7 n.10 (E.D. Pa. Aug. 16, 1989) (characterizing company controller as an officer).
14 89 Fed. Reg. at 38502 (to be codified at 16 C.F.R. § 910.1).
15 Id.
16 89 Fed. Reg. at 38418.
17 Id.
18 89 Fed. Reg. at 38419.
19 Id.
20 Id.
21 89 Fed. Reg. at 38420.