Davis Polk partners Kyoko Takahashi Lin and Veronica Wissel were quoted in Anti-Corruption Report discussing the potential effects and considerations for the FTC’s ban on non-compete clauses. The rule, which is expected to go into effect in September unless its proponents prevail, would almost entirely ban non-compete clauses, with the exception of those that already exist for senior executives.

Regarding who is included in the exception, Kyoko noted that it could include people in positions such as Chief Commercial Officer (CCO) or chief information security officer (CISO). “The threshold question is whether they are an executive officer. Some companies may take the view that they are,” she said.

Veronica added that Section 16 of the Securities Exchange Act of 1934, as amended, serves as a good guideline for determining who might qualify under the Final Rule’s exemption within publicly traded companies. She noted that “The FTC rule’s definition of senior executive is similar, and is even a bit narrower than the Section 16 definition.” However, she also said private companies would have more flexibility to decide who is a “senior executive” since they have not yet made the determination of policy-making roles for other purposes.

Kyoko agreed, saying, “if they are at a public company, we would first need to see if they are a Section 16 officer – and some CCOs, CPOs and CISOs are and others are not.”

Veronica noted that some companies may try to achieve a similar result by getting “more aggressive” with non-disclosure, non-solicitation or non-disparagement clauses.

Kyoko expanded on that, noting, “If non-competes are banned, confidentiality or trade secrets covenants may be the primary remaining contractual protection. So, we are encouraging companies, whatever happens with this rule, to look at their other existing covenants to make sure they have the best protection.”

However, Veronica warned that if a company seeks “to enforce those provisions as a pure end-run around the non-compete ban, then it may face FTC scrutiny.”

“It is hard to stop people from taking another job on the grounds that they are going to disclose, disparage or solicit. If a company took the view that someone could not take another job without doing those things, the FTC could say that is tantamount to a non-compete,” she continued.

However, Kyoko believes the FTC’s Final Rule is somewhat unlikely to proceed, given the plethora of different arguments being put forward against it. “There is a low chance of this rule seeing the light of day. More lawsuits may be coming. Those that have been filed put forward very compelling arguments,” she said.

At the same time, several states have adopted or further tightened prohibitions on non-competes in recent years, which, Kyoko pointed out, “are not subject to the same challenges.”

“How the FTC Non‑Compete Ban Could Impact CCOs and Other Top Executives,” Anti-Corruption Report (May 23, 2024) (subscription required) 

Copy link to share post