Employers across the country have been relieved of the obligation to comply with the Federal Trade Commission’s rule banning most postemployment noncompetes — for now. On August 20, U.S. District Judge Ada Brown of the U.S. District Court for the Northern District of Texas granted summary judgment for plaintiffs in Ryan LLC v. FTC.
The FTC rule banning post-employment noncompetes was published in the Federal Register on May 7, which means the rule will take effect on September 4, 2024, unless pending lawsuits to void the rule are successful.
Despite considerable uncertainty around when, or even whether, the rule will apply, employers should prepare now so as not to be caught flatfooted. The first step is to understand the rule’s parameters and potential impact on your business. Our FAQs guide you through the intricacies of the rule and the steps you should take while waiting for the lawsuits challenging the rule to be resolved.
1. Does the rule apply to B2B noncompetes?
No, the FTC rule does not apply to business-to-business (B2B) noncompetes. Instead, existing federal antitrust laws should continue to be considered when evaluating B2B noncompetes.
2. Does the rule apply to all workers?
No, there are limited exceptions. First, the rule does not invalidate existing noncompete agreements (i.e. agreements entered into on or before the effective date of September 4, 2024) with “senior executives.” After that date, new noncompetes with all US employees will be prohibited.
“Senior executive” means a worker who received “total annual compensation” of at least $151,164 in the preceding year (or the equivalent amount when annualized if the worker was employed during only part of the year) and who is in a “policy-making position.”
Second, the rule does not apply to workers outside of the United States. See FAQ 11 below.Continue Reading Thirteen Things You Didn’t Know About the FTC’s Noncompete Ban and Five Steps to Prepare Now in Case it Takes Effect
On Tuesday this week, the Federal Trade Commission (FTC) issued its highly anticipated final rule on noncompetes, imposing a near-total ban on worker noncompetes in the United States. Barring injunctive relief from legal challenges (which have already started), the rule will take effect 120 days from publication in the federal register.
Interestingly, the rule exempts noncompete covenants entered into pursuant to a bona fide sale of a business. While “bona fide” is not defined in the final rule, the Supplementary Information for the rule explains that the FTC considered but rejected percentage and dollar minimum thresholds for the sale of business exception to weed out “exploitative and coercive” noncompetes and clarified that excepted noncompetes must be given “pursuant to a bona fide sale.” The Supplementary Information further explains that the FTC considers a bona fide sale to be one that is made between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale. In contrast, the FTC specifically calls out as problematic “springing noncompetes,” which apply to employees in the event of a sale and mandatory stock redemption or repurchase programs because the employee has no goodwill to exchange in the sale for the noncompete and no meaningful opportunity to negotiate at the time of contracting.
Nevertheless, the bona fide sale exception is broad and preserves the status quo by allowing buyers in M&A transactions to obtain noncompetes from individual sellers in circumstances where such noncompetes are otherwise permitted currently. While the pending and anticipated legal challenges to the rule are significant and place the entire rule in jeopardy, the sale of business exception is not likely to be narrowed because of these challenges.
So, what does this new regime mean for M&A?
The Supplementary Information confirms that the new rule does not apply to B2B noncompetes or nonsolicits. Instead, the focus of the rule is noncompetes with workers that limit their ability to work for others. So the rule does not impact current B2B agreements.
Second, the FTC repeatedly makes the point that noncompetes must meet existing state and federal law restrictions (e.g., reasonable in scope and duration; limited to the goodwill to be acquired, etc.) to be enforceable, even if they otherwise fall within the sale of business exception in the new rule. This is the case because the FTC rule creates a new floor for noncompetes by preempting more lax state rules, but it does not preempt more stringent state laws or federal antitrust restrictions.Continue Reading Still Going Strong: M&A Noncompetes and the FTC’s Final Rule on Noncompetes
On April 23, the Federal Trade Commission voted 3-2 to issue its final rule on noncompetes, imposing a near-total ban on all employer-employee noncompetes in the US. Barring challenges (the first lawsuits have already been filed), the rule would become effective 120 days from publication.
The rule will be a game-changer for companies operating in the US if it takes effect as issued.
With only a few exceptions, the FTC’s now-final rule declares employer-employee noncompete clauses an “unfair method of competition,” and a violation of Section 5 of the FTC Act. The rule targets both formal noncompete clauses and “functional noncompete” clauses that have the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. This can include broad nondisclosure agreements that have the effect of precluding workers from seeking employment opportunities in the same field.Continue Reading Breaking News: The FTC Bans Nearly All Employer-Employee Noncompetes Except Those Given as Part of a ‘Bona Fide’ Sale of Business
We are pleased to share a recent LegalDive article, “Why companies should review noncompetes in equity award agreements,” with quotes from Barbara Klementz.
Given increased government scrutiny, employers need to be mindful of the time periods noncompetes cover and review state-specific requirements.
In the light of the sharp focus the federal government and a growing
On Tuesday, June 27, US antitrust agencies announced proposed changes to the premerger notification form and associated instructions and rules that implement the Hart-Scott-Rodino Act. Among other things, the proposed amendments require a labor market analysis including workforce categories, geographic information, and details on labor and workplace safety violations.
The proposed amendments are intended
Special thanks to Maura Ann McBreen.
The short answer is “no.”
Typically the enforceability of non-compete clauses has been subject to state law and more recently, many states have imposed limitations on the enforceability of non-competes. Some states, like California, North Dakota and Oklahoma, ban them entirely. However, the Federal Trade Commission (FTC) on January 5, 2023 issued a proposed rule that would significantly restrict the use of non-compete clauses between employers and employees as a matter of federal law. The FTC said that the proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also generally prohibit employers from using non-compete clauses and make it illegal for an employer to:
The proposed rule would generally not apply to other types of employment restrictions, like non-solicitation and non-disclosure agreements, unless such other employment restrictions were so broad as to function like non-competes. Since this function test is clearly open to interpretation, the reach of the proposed rule may be further expanded.Continue Reading My Company Requires Employees Sign Non-competes. Should We Panic Due To The FTC’s Proposed Rule?
On October 20, 2016, the US Department of Justice (DOJ) and Federal Trade Commission (FTC) issued antitrust guidance for human resource (HR) professionals and others involved in hiring and compensation decisions. The guidance warns of criminal prosecution against companies, HR professionals and other individuals, for formal and informal wage-fixing or no-poaching agreements between companies. The
