The Federal Trade Commission (FTC) has recently issued a groundbreaking rule aimed at banning non-compete agreements and clauses in the United States. The rule is designed to enhance competition and innovation by facilitating greater mobility in the workforce. The new rule may have a substantial impact on employment-related agreements but contains a carve out for non-competes that are tied to the “bona fide” sale of a business.
The Ban on Non-Competes
Starting September 4, 2024, the FTC’s rule will outlaw all non-compete agreements for any employee, unless stayed or blocked by legal action already underway. [1]
Non-compete agreements with “senior executives” entered into before September 4, 2024, will remain valid. However, for non-senior executives, any non-competes entered into before September 4, 2024, will no longer be enforceable, and employers must provide notice to workers that they are no longer bound by their non-competes.
The rule defines “senior executive” as workers earning more than $151,164 who are also in a “policy-making position.” The rule defines “policy-making position” to include a business entity’s president, CEO or equivalent, or any other officer or person who has policy-making authority. Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity. The FTC predicts that less than 1% of workers are estimated to be a “senior executive” under this definition, signaling its intended, narrow parameters.
Carve-Out for the Bona-Fide Sale of a Business
Under the proposed rule, a non-compete can still be enforced if it is part of the sale of a business where the restricted party is a substantial owner, member, or partner at the time of the sale. This exemption recognizes that non-competes in this context are essential for buyers who need assurance that the seller will not immediately start a competing business, thereby devaluing the original purchase.
Although “bona fide” is not defined in the rule, the rule explains that the intention is to provide an exception for deals made between two independent parties at arm’s length and in which the seller has had a reasonable opportunity to the negotiate the terms of.
Strategic Considerations for Businesses
With the proposed changes, businesses must consider their strategies regarding non-compete agreements:
- Reviewing Existing Contracts: Businesses should begin reviewing existing non-compete clauses in their contracts and assess whether adjustments are needed to comply with potential new regulations. This may include considering whether notification must be given to non-executive employees as it relates to any existing non-compete agreements.
- Drafting Enforceable Non-competes: For transactions involving a bona fide sale of business, it is crucial to draft non-compete agreements that are clear, justified, and tailored to meet the specific requirements of the FTC’s rule, ensuring they are defensible if challenged.
- Due Diligence Considerations: During the due diligence process in an M&A deal, buyers should ensure that existing contracts do not violate the new rule, consider legal risks and liabilities for non-competes that are no longer enforceable, and ensure a plan for compliance with the new requirements.
If you are contemplating an M&A transaction or are unsure how the FTC’s proposed rule might impact your business, please contact Harrison Clinton at (703) 526-5587 or hclinton@beankinney.com. Our firm practices in Virginia and the District of Columbia in addition to various other jurisdictions.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.
[1] 16 CFR 910.2(a).