FDIC seeks to restrict noncompete agreements

The Bank Merger Act prohibits banks from merging without the approval of the FDIC. On March 21, the FDIC revealed proposed revisions to its Statement of Policy on Bank Merger Transactions, which hasn’t been amended since 2008. 

Under the proposed SOP, deals resulting in a bank holding company with more than $100 billion in assets would face increased regulatory scrutiny. The FDIC is also proposing a blanket prohibition against using noncompete covenants in employment contracts with employees of businesses or branches a bank is forced to sell to gain FDIC approval for a proposed merger. This proposed move by the FDIC is one of several recent efforts by the federal government to restrict — if not ban — the use of covenants which restrict employee mobility.

Amber Rogers photo
Amber Rogers

Background to the Bank Merger Act

Under the Bank Merger Act, the FDIC, Office of the Comptroller of the Currency and the Federal Reserve are each responsible for scrutinizing and approving bank mergers. The OCC regulates, and reviews mergers for, national banks, and the Fed does so with some community banks as well as bank holding companies. The FDIC differs from the other bank regulators in its oversight of small community banks that aren’t members of the Federal Reserve System. It has the authority to regulate bank mergers involving an insured depository institution and mergers that would result in an FDIC-supervised institution.

Under the BMA, the FDIC independently reviews proposed bank mergers to determine whether the merger would result in a monopoly or potentially have other anticompetitive effects which would provide cause to stop the merger. The revised SOP would increase FDIC scrutiny of bank mergers by requiring the banks to “demonstrate how the transaction will benefit the public.”

Theanna Bezney image
Theanna Bezney

Non-competition restrictions

Generally speaking, noncompetition covenants prohibit an employee from working in a similar capacity for a competitor, or operating their own competing business, once they leave their current employment. 

In the proposed amended SOP, the FDIC acknowledges that to mitigate anti-competitive concerns, it may require merging institutions to divest business lines or branches before the merger can be consummated. In those situations, the FDIC’s SOP announces the agency “will generally require that the selling institution will not enter into noncompete agreements with any employee of the divested entity nor enforce any existing noncompete agreements with any of those entities.” There is no carve-out for high-ranking employees or for loan officers with close working relationships with the selling institution’s customers. Despite not having a formal policy in place, the FDIC has already taken this approach on a deal-by-deal basis, including not approving the 2023 merger between Columbia Banking System and Umpqua Holdings Corporation until they agreed to waive the non-compete restraints on branch managers, assistant branch managers, or loan officers at branches that were divested as part of the merger’s approval process.

The FDIC’s proposed change is one of several recent efforts by the federal government to increase competition in the labor market by prohibiting non-competes.

Like the FDIC, the Federal Trade Commission published its own rule on April 23 set to take effect in August, which would prohibit the use of noncompetition agreements nationwide, with the exception of those entered in connection with the sale of a business. Several lawsuits were immediately filed in opposition of the proposal, including one from the U.S. Chamber of Commerce, arguing the FTC exceeded its rule-making authority. Last year, even without the authority of a final rule, the FTC filed three complaints against employers over their use of noncompetes, arguing the restraints suppressed employees’ wages and were therefore an unfair labor practice. Because banks are largely exempt from the FTC’s regulatory authority, the FDIC’s SOP may be an effort to fill a perceived gap in restrictions against the use of non-competition agreements in the banking industry.

Similarly, the General Counsel for the National Labor Relations Board issued a memo in May 2023 announcing the NLRB’s position that noncompetition agreements violate the National Labor Relations Act when they “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.” Thus, the General Counsel contends that, except in “limited circumstances,” offering, maintaining, or enforcing noncompetition agreements violate employees’ rights under Section 7 of the NLRA. Of note, however, is the term “employee” under the NLRA expressly excludes individuals employed as a supervisor, so non-competition agreements for management-level employees should not violate NLRA-protected rights.

States and localities are also legislating their own bans against noncompete restraints. California, for example, passed two laws in 2023 to reinforce its longstanding disfavor of non-competition covenants: Assembly Bill 1076 and Senate Bill 699. Assembly Bill 1076 codifies existing California case law, rendering any noncompete agreement unenforceable in the employment context, no matter how narrowly tailored, except for a sale or dissolution of a business. Violation of AB 1076 constitutes a violation of the Unfair Competition Law, subject to a civil penalty of up to $2,500 for each violation.

Effective as of January, Senate Bill 699 amended California’s Business & Professions Code by adding new Section 16600.5 and making contracts with a restraint on trade unenforceable in the state, regardless of where the agreement was signed or where the employment relationship was established. In other words, a valid noncompetition agreement entered into in another state automatically becomes unenforceable when the employee moves to California. SB 699 entitles employees, former employees, and applicants to recover damages, injunctive relief, and attorneys’ fees for successfully challenging and invalidating restrictive covenants, but there is no reciprocal recovery available to employers who successfully defend against such claims.

Next steps

The FDIC’s SOP is currently in the notice and comment period, and the agency has requested comments be received within 60 days of the date of its publication in the Federal Register. The FDIC will review the comments and may modify proposed revisions before enacting the final SOP amendment.

Amber Rogers is a Labor and Employment partner at Hunton Andrews Kurth LLP.  Amber’s national practice assists clients with traditional labor relations and litigation, employment advice and counseling, and complex employment litigation. Theanna Bezney is a Labor and Employment Associate at Hunton Andrews Kurth.  Theanna advises employers on their rights and obligations under federal and state employment laws; workplace policies and practices, and employment agreements.