Issue Alert – FTC Proposes Eliminating Most Non-competes

Summary: The Federal Trade Commission (FTC) has proposed a rule that would eliminate all non-competes on individual workers after their employment or engagement ends (employees and independent contractors). It could also eliminate or narrow some non-solicitation and non-disclosure provisions. The rule would also eliminate non-competes and some non-solicitation and non-disclosure provisions that apply to those who own less than 25% of a business being sold. The proposed rule applies to existing and new agreements.

(estimated 2-3 minute read)

Suggested Action Items

1. Review the list below.
2. Inform your key team members, particularly those responsible for onboarding paperwork and enforcing non-competes and other restrictive covenants, and those involved in M&A transactions.
3. Have someone on your team prepare an updated list of all existing and planned non-competes and other restrictive covenants (current agreements and standard form agreements that you use).
4. Make an appointment with your attorney, accountant, banker and other relevant professional advisors to discuss if and when any action should be taken.

General Points

• What this proposed rule is not: This is not a final rule. It will probably change.
• What happens next: The rule will go through a public comment period. Those comments may result in changes to the rule, or may result in discarding the rule.
• When could there be a final rule: No sooner than March 2023, probably later.
• When could there be clarity: Unless no rule is adopted, there will probably not be legal clarity for years. This proposed rule will almost certainly result in extensive and lengthy litigation.
• Would the proposed rule apply to existing agreements as well as future agreements: Yes.
• Possible Impact on state law: The proposed rule would supersede state law.

Impact on Purchase or Sale of a Business

• Possible impact on non-competes in the sale of a business: Illegal for owners of less than 25% of the seller to be put under a non-compete. Those owning at least 25% of a business being sold may still be subject to non-competes under the proposed law.
• Possible impact on non-solicitation, non-disclosure provisions and other restrictive covenants: Probably illegal for owners of less than 25% of the seller if the provision is effectively a non-compete. For owners with at least 25% ownership, these provisions would still be legal to the extent permitted under current law.
• Possible impact on previously paid purchase prices: It is unclear whether invalidation of non-competes could entitle buyers to recover a portion of the purchase price for invalidated non-competes and other restrictive covenants.
• Possible impact on M&A tax allocations: It is unclear whether invalidation of non-competes could result in requiring reallocation of the purchase price previously attributed to a non-compete that is invalidated prior to its expiration.

Impact on employees and Independent contractors

• Would the proposed rule apply to executive-level and highly compensated employees and independent contractors, as well as entry-level workers: Yes; it would apply to all workers.
• Possible Impact on worker non-competes during employment/engagement:  Legal and enforceable to the extent permitted by current law.
• Possible Impact on worker non-competes after employment/engagement: Illegal.
• Possible Impact on worker non-solicitation and non-disclosure provisions during employment/engagement: Legal and enforceable to the extent permitted by current law.
• Will employers be able to reduce compensation for invalidation of non-competes or other restrictive covenants: Not addressed.
• Possible impact on worker non-solicitation and non-disclosure provisions during employment/engagement: Legal and enforceable to the extent permitted by current law.
• Possible impact on worker non-solicitation and non-disclosure provisions after employment/engagement: These terms will probably receive much greater scrutiny. The more they resemble a post-termination non-compete, the more likely they will be reduced in scope or invalidated altogether.

Stay tuned

The thoughts contained here are general in nature. The text of the proposed rule is very technical in places and leaves ambiguity on important topics. The information in this email is intended as a helpful guide to this critical development. This email is not legal advice and does not form an attorney-client relationship.

Read the text of the rule or Submit a comment to the FTC by March 10, 2023.