Key Takeaways:
- Last week the United States Federal Trade Commission (FTC), by a 3-2 margin, voted to ban nearly all employee noncompetes.
- All existing and new noncompetes will be unenforceable, with limited exceptions for senior executives and bona fide sales of a business.
- The new rule is set to take effect 120 days after it is published in the Federal Register, but legal challenges and potential administrative delays could slow the process.
New Notice Required to Existing Employees with Noncompetes
- For employees currently subject to a noncompete, other than senior executives, employers will be required to formally notify employees that such agreements will no longer be enforceable. A model notice can be found here on the FTC’s website.
- Exception for Existing Noncompetes with Senior Executives
- Existing, and only existing, noncompetes with senior executives will remain enforceable. The FTC defines “senior executive” as a worker who is in a policy-making position that earns total yearly compensation of more than $151,164. This carveout for senior executive employees provides employers with a short window to negotiate and/or revise noncompetes agreements for these individuals.
Bona Fide Sale of Business Exception
- Noncompetes “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets” are exempt from the new noncompete ban. Transactions are bona fide where they are made “in good faith” and “between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale.”
Next Steps
- Now is the time to prepare because the noncompete ban is not yet effective; and we don’t know when, or even if, it will be. Additionally, the ban is already facing legal challenges from the business community which may further delay when it takes effect.
- Employers should take this time to review noncompetes with existing and former employees.
- Consider additional safeguards for trade secrets and implement information security protocols.
Reach out to your employment counsel, especially when drafting new and reviewing existing noncompetes, including Michael Edwards, Mustafa Hassoun, Eric Lansverk, Robert Van Cleve, Matt Weger, or Derek Woolston, or Barry Ziker.
The information contained in this update is provided for informational purposes only. It should not be construed as business, legal, accounting, tax, financial, investment or other advice on any matter and should not be relied upon as such.