U.S. Bans Non-Competes Nationwide Except in M&A - A Corporate Perspective

On 23 April 2024, the United States Federal Trade Commission (FTC) issued a final rule, which effectively bans non-competition agreements for workers in all circumstances except in M&A (the “Rules”).

Particulars of the Rule

The Rules represent a watershed moment in the evolution of non-competition agreements in the United States. Prior to their enactment, non-competition agreements for workers were lawful to varying degrees in all states except California. However, even in California, there was an exception permitting non-competition agreements in the context of M&A. This exception continues to apply as it is expressly stated in the Rules.

Going forward, non-competition agreements will not be allowed on a nationwide basis for all works, including senior executives. The existing non-competition agreements for workers who are not senior executives will also be invalid under the Rules on a going forward basis. Furthermore, employers are required to notify them of this fact within 120 days, with the FTC providing model language in the Rules to assist with the process. The existing non-competition agreements for workers who are senior executives remain valid.

The term “worker” includes employees and independent contractors (e.g. advisors). The term “senior executive” means a worker who was in a “policy-making position” whose compensation was US$151,164 or greater in the preceding year. The term “policy-making position” means someone who was in a position of final authority to make business decisions for a common enterprise.^[1]

Potential Consequences from a Corporate Perspective

The exception in the Rules for M&A is highly consequential for corporate practitioners. Specifically, the Rules do not apply to “a non-compete clause that is 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”. Accordingly, as the Rules do not apply to M&A, existing state law on non-competition agreements in M&A will continue to apply. As stated above, non-competition agreements in the context of M&A is a common exception to restrictions against non-competition agreements, including in California where they have always been prohibited as a general rule. 

The FTC noted that there are less obstructive ways to ensure an employer’s protection of trade secrets following departures, including confidentiality and trade secrets undertakings. In practice, employers ranging from start-ups to established multinational companies may more actively monitor post-employment compliance of confidentiality and trade secrets undertakings. There may be unsettled questions arising from the use of claw-backs or deferred compensation arrangements to ensure compliance, which will have to be settled in the courts.

In the venture capital space, the Rules may facilitate the formation of more start-ups, as the Rules ease the burden that may have applied to founders and key employees who may be subject to the non-competition agreements of their former employer.

For more information on how we can help you with U.S. corporate matters, please contact Charles Wu at Charles.Wu@clydeco.com