In a move that has employers everywhere scrambling, the Federal Trade Commission (FTC) just dropped the mic on non-compete agreements. On April 23, 2024, the agency finalized a rule that essentially bans these restrictive covenants in employment contracts.
The FTC’s mic drop moment has huge implications for employers across the country. Here are the key takeaways:
- The rule prohibits employers from entering into new non-competes with any worker, from the lowliest intern to the CEO.
- Existing non-competes with senior executives remain enforceable, but employers must notify all other workers that their non-competes are now worthless by the effective date.
- The FTC defines “non-compete” in the broadest possible terms – any contractual term that restricts a worker from taking a new job or starting a competing business.
- There are a few exceptions, like non-competes entered into as part of selling a business.
- The rule preempts inconsistent state laws, but states can still impose even tougher restrictions on non-competes.
Employers are already gearing up to legally challenge the FTC’s rule. But if it survives, it will be a major blow to companies’ ability to protect their secrets, intellectual property and customer relationships through non-competes.
So what’s an employer to do? Here are a few tips:
- Rip up those non-compete agreements, stat – except for the ones with senior executives.
- Look into alternative measures to safeguard your confidential info, like narrowly tailored non-disclosure and non-solicitation agreements.
- Stay tuned for the legal challenges and be ready to comply if the rule takes effect.
The FTC just dropped the mic on non-competes. Employers need to act fast to stay on the right side of this game-changing rule. Consult with legal counsel to ensure compliance and explore other ways to protect your business.
Important note for Business Owners who are selling their business
The FTC’s final rule banning non-compete agreements includes a limited exception for non-competes entered into as part of the bona fide sale of a business[1][2][3]. This exception would apply to business owners who sold their companies and became employees of the acquirer subject to non-competition clauses.
Specifically, the rule states that it does not apply to “a non-compete clause entered into by a person who is selling all or substantially all of: (i) An equity interest in a business entity; or (ii) An entity’s operating assets, if the person will no longer own any interest in the business entity after the sale.”[1]
However, the FTC commentary notes that the exception only applies to the actual seller of the business, not other employees who may have non-competes imposed on them as part of the sale[1]. The FTC also declined to specify exactly what constitutes a “bona fide sale” that would qualify for the exception[1].
So in summary, business owners who sell their companies and become employees of the acquirer can still be subject to enforceable non-compete agreements under this exception. But the exception is narrow and does not extend to other employees who may be required to sign non-competes in connection with the sale.
Citations:
[1] https://www.winston.com/en/blogs-and-podcasts/competition-corner/ftc-approves-final-rule-banning-non-compete-agreements
[2] https://www.jw.com/news/insights-ftc-noncompetes/
[3] https://ogletree.com/insights-resources/blog-posts/ftc-adopts-final-rule-banning-employers-from-entering-non-competes/
[4] https://www.huntonak.com/en/insights/ftc-final-rule-limiting-non-competes-considerations-for-m-and-a-transactions.html
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