The recent Federal Trade Commission’s (FTC) final rule implementing a ban on noncompete provisions in contracts may have numerous consequences for both employers and employees. The ban stands to impact a wide variety of business transactions, especially those involving noncompete agreements. As analyzed by Bloomberg Law, the rule features several key components and implications to be aware of for any party involved in business transactions.
An important aspect of the new rule is its expansive definition of a “worker” as someone currently or previously employed, regardless of payment. The rule intentionally leaves “employer” undefined to cover all workers in any employment situation, mitigating possible evasion of the ruling through complicated employment relationships.
Pay particular attention to the provisions of the rule relating to merger and acquisition transactions. The rule stipulates a business sale exception, which allows a noncompete agreement with a person selling their business or allotting all ownership. The FTC demands these sales to be “bona fide”, transacted in good faith, and generally executed between two independent parties.
Yet, there are further implications to consider. The FTC has clarified that certain transactions do not qualify as “bona fide” sales, including “springing” noncompetes or ones arising from repurchase rights. Transactions which lack the opportunity for negotiation or the exchange of real value, such as goodwill, also fall foul of the new rule, leaving them potentially unenforceable.
Moreover, the regulations may pose questions for investment funds, due to the unspecified applicability to carried interest vehicles, such as partnerships or LLCs. The implications of noncompetes entered into in individual partner or member contexts outside employer-employee relationships remain uncertain, in large part due to the FTC’s omission of an “employer” definition.
In the face of this regulatory landscape, those concerned over the protection of their confidential business information are advised to explore alternative methods of safeguarding this material. Options could include non-disclosure agreements, enforcement of intellectual property rights under trade secret and patent laws, and initiatives to increase employee retention.
Donald Hammett, a partner in Alston & Bird’s investment funds group, and Christina Heddesheimer, a senior associate in the same group, note that the FTC’s final rule is expected to take effect late in August. However, enforcement could be delayed due to pending legal challenges.