Implications of the FTC’s Final Rule on Noncompetes and M&A

An article published in Bloomberg Law sheds light on the Federal Trade Commission’s (FTC) new rule which prohibits noncompete provisions in employment contracts. This rule applies to all workers, regardless of their relationship with their employer, and defines a non-compete as any condition that limits a worker’s capacity to look for employment elsewhere or begin a business after leaving their current job. The question is how does this rule affect noncompetes and M&A transactions?

Authors Donald Hammett and Christina Heddesheimer of Alston & Bird have mentioned in the article that there is an exception for noncompetes in the context of selling a business, but it must be a genuine sale and not a way to evade the rule. The FTC has emphasized that such sales should be arms-length transactions between independent parties, with fair negotiation opportunities for the seller.

The rule excludes certain situations from the “bona fide sale” exception, such as noncompetes triggered by contractual breaches or stock redemptions without proper negotiation opportunities for the worker.

Enforcement of the rule is expected to start in late August, with potential delays due to legal challenges. Investment funds are uncertain about how the rule applies to noncompetes involving partners or members of LLCs, but it’s likely to allow noncompetes for entity general partners while excluding specific individuals from such agreements.

Businesses concerned about protecting confidential information should explore alternative measures like nondisclosure agreements or enforcing intellectual property rights.