FTC Chair suggests broad exception for senior executives under noncompete ban

FTC Chair Lina Khan

As you probably know, on April 23, 2024, the Federal Trade Commission issued a rule banning virtually all noncompetes. But the rule created some ambiguous exceptions, including for noncompetes with senior executives.

That rule is currently being challenged in three lawsuits: Ryan, LLC v FTC, U.S. Chamber of Commerce v. FTC, and ATS Tree Service v. FTC.

If the challenges are unsuccessful, the rule will go into effect on September 4, 2024.

There are many questions about the scope of the rule, including how the exceptions work.

Senior Executives”

The rule exempts noncompetes signed by “senior executives” before the rule becomes effective from the ban.

That begs the question: Who is a senior executive?

In short, according to the FTC’s 570-page rule and accompanying commentary, to qualify as a “senior executive,” the worker must be in the C-suite or hold an equivalent role, have “final authority to make policy decisions that control significant aspects of a business entity or common enterprise,” and earn over $151,164 (excluding discretionary bonuses, board, lodging, payments for medical, dental, or vision insurance, retirement contributions, or other “fringe benefits”).

That exception seems pretty limited.

Because it is!

FTC Chair’s explains the exemption differently

Despite the narrowness of the definition, FTC Chair Lina Khan suggested that it is not that limited.

On April 25, 2024 (two days after issuing the rule), CNBC’s Squawk Box interviewed Chair Khan about the rule.

During her interview, the host, Andrew Ross Sorkin, asked the following question:

Most people who are on TV have contracts that prevent them — so here we are at CNBC — NBC Universal is the parent company — ABC’s just down the street. Literally, “Good Morning America” is right there. CBS is just across the street as well. I can’t walk — I could not call up my boss today and say, “You know what, thank you so much, this has been wonderful. I’m going to work over there tomorrow morning.” Do you think I should be able to?

Chair Khan responded:

If you have a current contract that reflects the fact that this noncompete is in the contract, your compensation package probably also reflects that. We don’t want to disturb that because we realize that for people who are doing very well for themselves, who are well-situated to bargain, the contract and the compensation already reflects the value of the noncompete.

As you probably figured out by now, Mr. Sorkin does not qualify as a senior executive under the rule.

So what gives?

Good question.

Members of an LLC or partners in a partnership

Separately, the FTC’s noncompete rule prohibits noncompetes for “workers.” The rule defines who is a “worker” as follows:

Worker means a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.

Relevant to the analysis, the rule defines noncompetes as a “term or condition of employment . . . .”

The inevitable question, then, is: Does “worker” include members of an LLC or partners in a partnership? (Members in LLCs and partners in partnerships are not employed. Accordingly, there are no “terms or conditions of employment.”)

That question was posed almost immediately by Mike Weil, an outstanding employment lawyer in California. Mike noted that, although California bans noncompetes, it has exceptions for members of LLCs and partners in a partnership.

Well, Mr. Sorkin asked that too.

Unfortunately, that issue was part of a broader question about “workarounds” like those we see in California. For background, companies in California have for years used many other tools to substitute for the general lack of employee noncompetes: noncompetes with members of LLCs; noncompetes with partners in partnerships; B2B no-poach agreements; extensive enforcement of trade secret misappropriation (both through cease and desist letters and lawsuits); and other workarounds.

Chair Khan ultimately never answered that specific question. Instead, she pointed to the significant innovation in California despite its ban as proof that innovation will be boosted without noncompetes.

That, of course, ignores the long history of how companies in California worked around the noncompete ban. Unfortunately, consistent with much of the research relied on by the Commission for the noncompete rule, Chair Khan’s perspective mistakes correlation for causation.

* * *

If you want to ask the FTC about these issues, you will have that opportunity soon enough.

The FTC will be hosting a webinar on the ban on Tuesday, May 14, at 11:00 AM ET. Email your questions to asknoncompete@ftc.gov.