Question

Does the Federal Trade Commission’s (FTC) ban on non-competition agreements include an exception for the sale of a business?  And are there any updates on the lawsuits against the ban?

Answer

Yes, the FTC rule, which takes effect September 4, includes an exception for the sale of a business similar to the Massachusetts law on non-competition agreements (NCAs).

When purchasing a business, buyers often insist on a non-compete agreement to ensure the seller doesn’t use the proceeds from the sale to fund a competing venture. The FTC rule allows an exemption for NCAs when a “non-compete clause 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 all or substantially all of a business entity’s operating assets.”

The Massachusetts NCA law  exempts from its definition of NCAs those agreements that are “made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, when the party restricted by the non-competition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal.”

Note that the FTC does not require that the individual subject to the NCA be a “significant owner of, or member or partner in” the business being sold to be exempt from the ban on NCAs, as the Massachusetts NCA law does.  The FTC rule’s exception will likely be more broadly interpreted as it does not specify a certain ownership threshold.

The FTC rule may also include some non-solicitation agreements in its exception, if they effectively prevent a worker from seeking new employment. Non-solicitation agreements are expressly allowed under the Massachusetts NCA law. The FTC rule is not intended to pre-empt state law to the extent that a state law is more protective of workers, but there is great potential for conflict between the new rule and state laws.

Challenges to the FTC Rule

As of now, no developments would prevent the FTC rule from taking effect on September 4, 2024.  A federal judge in Texas granted a temporary injunction to parties opposing the ban. Still, the ruling only applies to those specific parties and not to employers represented by trade associations. A similar injunction was denied by a federal court in Pennsylvania.  The main argument in these challenges is that the FTC exceeded its authority in issuing the ban.

What to Expect Moving Forward

Employers should now prepare for the rule to take effect as scheduled. As of this publication, there is no nationwide ban on non-compete agreements, but the situation may evolve depending on ongoing legal challenges.

Need More Information?

If AIM members have questions about the new FTC rule or any other HR matter, they may call the AIM HR Helpline at 800-470-6277 or via email at helpline@aimnet.org