Earlier this week, the Federal Trade Commission issued its long-awaited final rule on non-competition covenants. Federal Trade Commission, 16 CFR Part 910
No New Non-competes: In short, the final rule is a comprehensive ban on new non-competes with all workers at all levels (including employees, independent contractors, interns, volunteers, etc.), effective 120 days after publication of the Final Rule in the Federal Register, which we expect to occur very soon.
Existing Non-competes only for Senior Execs: The rule allows existing non-competes with senior executives to remain, while declaring existing non-competes with other workers to be unenforceable, and requires companies to inform those worker that their non-compete covenants will not be enforced.
Sale of Business Exception: A non-compete entered into pursuant to a “bona fide sale” is not prohibited by the rule. The FTC drew some blurry lines in the sand: “In general, the Commission 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. So-called “springing” non-competes and non-competes arising out of repurchase rights or mandatory stock redemption programs are not entered into pursuant to a bona fide sale because, in each case, the worker has no good will that they are exchanging for the non-compete or knowledge of or ability to negotiate the terms or conditions of the sale at the time of contracting. Similarly, sham transactions between wholly owned subsidiaries are not bona fide sales because they are not made between two independent parties.”
Will it Stand? Many have argued that the FTC has exceeded its rule-making authority. Court challenges are already underway, and likely the Rule will be stayed pending a final court ruling. However, as noted by Morningstar Government Actions Partner, Swain Wood, “[t]here is evidence that political support for advancing workers’ bargaining position with employers may be growing in some quarters. As a result, even if legal challenges to the new FTC rule prove successful, there will likely be continued activity on this issue in state and federal legislative arenas and among State Attorneys General.” So, stay tuned.
Anything to do now? Now is a good time to review and update your restrictive covenants. If the Rule becomes effective in its current form, non-competes entered with senior executives prior to the effective date will remain in force, so make sure you have those in place. Many confidentiality and nonsolicitation covenants will need to be tweaked to avoid being swept under the auspices of the Rule. And, for all workers and all restrictive covenants, it is important that covenants be severable in case the court carves down the Rule and so that a covenant found to be invalid will not invalidate other covenants.
Should you have any questions regarding this ruling, please do not hesitate to contact our firm.
