Two Exceptions to FTC's Non-Compete Ban
Exceptions to the Ban
Existing non-compete agreements for “senior executives” can remain in place, the FTC said, although no new non-competes are permitted even with respect to senior executives. Notably, the FTC’s definition of senior executive is more limited than the Securities and Exchange Commission’s definition of executive officer. Senior executives are defined to include only those workers who both (1) earned more than $151,164 in the previous year and (2) are in a policy-making position.
“Policy-making position” includes the business’ president, CEO and any other officer who has policy-making authority. That is also defined by the FTC, including final authority to make policy-related decisions that control significant aspects of the business entity or enterprise.
An exception also exists for the bona fide sale of a business. The ban does not apply to non-competes entered into with respect to the bona fide sale of (1) a business entity, (2) an individual’s interest in a business entity or (3) all or substantially all of a business entity’s operating assets.
A sale is considered “bona fide” if it is an arm’s length transaction between two independent parties in which the seller has a reasonable opportunity to negotiate the terms of the sale.
The FTC’s “bona fide” requirement is designed to prevent employers from requiring employees to agree to non-competes when they’re hired that anticipate future sales. The requirement is also meant to prevent companies from using sham transactions entered into with wholly owned subsidiaries and related entities to impose otherwise prohibited non-competes.
However, the FTC also eliminated other limitations that would have applied to the bona fide sale exception. In the proposed rule, the exception would only be available with respect to sales where the seller had at least a 25% ownership interest in the business. The FTC also noted that non-competes entered into in connection with a business sale will also be governed by state laws, which typically require that the non-compete agreement be necessary to protect the value of the business.
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