January 10, 2023

Non-Competes: How Broad is the FTC’s Proposed Sale of Business Carveout?

Last week, the FTC issued a proposed rule that would ban the use of non-compete agreements in most settings.  However, the FTC does propose to allow them in connection with the sale of a business.  Of course, the devil is in the details.  Let’s start with the text of the FTC’s proposed carve-out, which is set forth in Section 910.03 of the proposed rule and appears fairly straightforward:

The requirements of this Part 910 shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause. Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law.

Embedded within that definition are a few defined terms, the most notable of which is the term “substantial owner, substantial member or substantial partner.”  Section 910.01 defines these terms to include only “an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.”  That’s a pretty limited universe of people, and in many settings may exclude a number of folks that a buyer has a legitimate interest in seeking a non-compete from as part of the deal.

Another thing to bear in mind is that the FTC proposes to define the term “non-compete clause” functionally, and the proposed rule says that it includes any contractual obligation that “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”  The way the FTC appears to interpret this language suggests that it could potentially cast a very wide net.

In that regard, one of the examples of these de facto non-competes that the FTC cites in the proposal is a provision requiring workers to reimburse the employer for training costs where those payments are not reasonably related to the costs the employer incurred for training the worker. That’s a crappy thing to do and certainly an impediment to changing jobs, but if that’s the standard for what’s regarded as a “prohibition” from seeking employment, what about things like a haircut under a buy-sell agreement that’s triggered by a resignation, or equity awards with cliff vesting tied to a period of continued employment?

John Jenkins