Don’t Panic – The FTC’s Proposed Non-Compete Ban Could Not Apply to the Sale of Your Enterprise

We’ve got beforehand talked in regards to the worth of non-compete agreements when promoting a enterprise, so that you, as a enterprise vendor or purchaser, could also be spooked by current headlines concerning the proposal by the Federal Commerce Fee (FTC) to ban non-competes nationwide. Don’t panic—whereas splashy, the headlines don’t inform the complete story, notably within the context of promoting a enterprise.

What would the proposal prohibit?

As a reminder, a non-compete is an settlement between an organization and an worker that prohibits or restricts the worker’s means to work for one more enterprise after their termination of employment. The everyday non-compete blocks the worker from working for a competitor or beginning a competing enterprise inside a sure geographic space for a sure variety of years after their employment ends. If the worker violates the non-compete, then their former employer can sue them for breach of contract.

Whereas enterprise homeowners and potential patrons view non-competes as obligatory to guard the worth of a enterprise, the FTC believes that non-competes hurt workers by stopping them from transferring to increased paying jobs or beginning their very own enterprise.

Because of this, it has proposed a rule that, if it turns into legislation, would prohibit any firm from getting into right into a non-compete settlement with any worker, contractor, or different employee. It might additionally require employers to terminate any present non-compete agreements.

At the moment there isn’t a federal legislation concerning non-competes, which suggests every state can provide you with its personal guidelines. Whereas some states, equivalent to California, have already banned non-competes for employees of their state, most states nonetheless allow affordable non-competes for some or all workers. So, this proposal would definitely change the sport for corporations throughout the U.S.

Nonetheless, the proposal comprises an vital exception to the ban that applies to employee-shareholders when a enterprise is bought. 

What’s the “sale exception?”

The “sale exception” would permit corporations to enter into non-compete agreements with sure employee-shareholders in reference to the sale of a enterprise. For the exception to use, you will need to meet two standards: (1) the worker have to be at the least a 25% shareholder and (2) the non-compete clause have to be entered into upon the sale of the enterprise entity, (or the employee-shareholder’s sale of their complete possession within the enterprise entity) or a sale of considerably all the belongings of the enterprise. (Observe {that a} non-compete entered in reference to a sale would nonetheless be topic to state legislation, which can embrace deadlines, geographic constraints, or different circumstances).

Why shouldn’t I panic?

1. At the beginning, that is only a proposal and isn’t but legislation. It might by no means grow to be legislation, or it could be watered down earlier than the ultimate rule is adopted. The proposal is open to public remark for a interval of 60 days, after which the FTC will draft the ultimate rule (or it may withdraw the proposal). The FTC has particularly requested for feedback on whether or not executive-level workers must be handled in a different way than rank and file workers, so it’s doable that the ultimate rule would nonetheless allow non-competes for executive-level workers. Even when the FTC passes a remaining rule, it’s anticipated to face authorized challenges.

2. Second, as defined above, the proposal nonetheless permits a enterprise to enter right into a non-compete with some employee-shareholders on the time the enterprise is bought, and the proposal offers no further guidelines for these agreements aside from these already in impact underneath state legislation. These massive employee-shareholders are probably the identical group of people from whom a purchaser would need to safe a non-compete, so it could be “enterprise as standard” for a lot of offers.

3. Third, the proposal doesn’t prohibit non-solicitation agreements and nondisclosure/confidentiality agreements which, when used collectively, may nonetheless present enterprise homeowners and patrons with some safety. Non-solicitation agreements prohibit former workers from trying to poach a enterprise’s purchasers or prospects. They’ll additionally embrace language prohibiting former workers from attempting to steal a enterprise’s workers. Nondisclosure or confidentiality agreements stop workers from disclosing or utilizing commerce secrets and techniques or different particular data acquired from the employer. So, even should you can’t stop an worker from transferring to a competitor or beginning their very own enterprise in the identical trade, you may nonetheless use a mixture of different agreements to forestall the previous worker from contacting your present and former prospects and prospects, your workers, and utilizing or disclosing your confidential data.