DealLawyers.com Blog

Yesterday, the FTC adopted a final rule banning most non-competes in a 3-2, party line vote.  Like the proposed rule, the final version includes an exception for non-competes entered into in connection with the bona fide sale of a business. The carve-out is contained in Section 910.3(a) of the rule, and here’s the relevant language:

Bona fide sales of business. The requirements of this part 910 shall 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.

Originally, the carve-out would have applied only to non-competes with a “substantial owner, substantial member or substantial partner” of the business entity. In turn, the proposal would have defined these terms to include only “an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.”

In a prior blog on the proposed rule, I observed that ownership requirement would have excluded a lot of folks that a buyer has a legitimate interest in seeking a non-compete from as part of the deal. A number of commenters who otherwise supported the proposal pointed that out to the FTC, and the agency ultimately eliminated that 25% owner limitation in the final rule, noting in the adopting release that:

The proposed requirement that an excepted non-compete bind only a “substantial” owner, member or partner of the business entity being sold was designed to allow those non-competes between the seller and the buyer of a business which are critical to effectively transfer goodwill while prohibiting those which are more likely to be exploitative and coercive due to an imbalance of bargaining power between the seller and the buyer.

However, commenters persuasively argued that the proposed 25% ownership threshold was too high because it failed to reflect the relatively low ownership interest held by many owners, members, and partners with significant goodwill in their business. The Commission declines to maintain the “substantial” interest requirement with a lower percentage threshold for the same reason.

The rule becomes effective 120 days after publication in the Federal Register, but stay tuned, because the dissenting commissioners questioned the FTC’s authority to adopt the rule and litigation challenging it is certain.  We’ll be posting memos on the rule in our Antitrust Practice Area.  If you’re interested in some of the broader implications of the FTC’s new rule, check out this morning’s blog from Meredith on CompensationStandards.com.

– John Jenkins