Potential Exceptions Under FTC’s Non-Compete Ban

Potential Exceptions

Status Under Final Rule

FTC Comments/Rules

Sale of Business

Not prohibited

Codified in § 910.3 – The exception “shall not apply to a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity,[3] of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets”

Note that the Final Rule does not contain the 25% ownership threshold that the FTC included in its proposed rule

This exception would not include, however, “[s]o-called ‘springing’ non-competes and non-competes arising out of repurchase rights or mandatory stock redemption programs.” According to the FTC’s notice, these “are not entered into pursuant to a bona fide sale because, in each case, the worker has no good will that they are exchanging for the non-compete or knowledge of or ability to negotiate the terms or conditions of the sale at the time of contracting”

Non-Solicits (customer and employee)

Not categorically prohibited

But could run afoul of the Final Rule where they “function to prevent a worker from seeking or accepting other work or starting a business.” (And see 2016 Joint DOJ/FTC Guidance for HR Professionals stating that certain non-solicit agreements between companies (“no poach” agreements) can be criminally illegal).

“Non-solicitation agreements are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business”

NDAs

Not categorically prohibited

Examples of broad NDAs that might be prohibited:

• NDAs prohibiting workers from “disclosing, a future job, any information that is ‘usable in’ or ‘relates to’ the industry in which they work”, i.e., any information that is usable in the industry regardless of whether it was ever used by the company and regardless of whether it was ever owned by the company; and
• NDAs prohibiting workers from disclosing any information or knowledge the worker may obtain during their employment whatsoever.

“[A]n NDA would not be a non-compete under § 910.1 where the NDA’s prohibitions on disclosure do not apply to information that (1) arises from the worker’s general training, knowledge, skill or experience, gained on the job or otherwise; or (2) is readily ascertainable to other employers or the general public”

NDAs “do not by their terms or necessarily in their effect prevent a worker from seeking or accepting work with a person or operating a business after the worker leaves their job”

Garden Leave

Not categorically prohibited

“[T]he Commission notes that an agreement whereby the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis would not be a non-compete clause under the definition, because such an agreement is not a post-employment restriction. Instead, the worker continues to be employed, even though the worker’s job duties or access to colleagues or the workplace may be significantly or entirely curtailed”

Forfeiture for Competition

Prohibited

“Another example of a term that ‘penalizes’ a worker, under § 910.1, is an agreement that

extinguishes a person’s obligation to provide promised compensation or to pay benefits as a result of a worker seeking or accepting other work or starting a business after they leave their job. One example of such an agreement is a forfeiture-for-competition clause, which, similar to the agreement with liquidated damages described previously, imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship,

expressly conditioned on the employee seeking or accepting other work or starting a business”

Training Repayment Agreement (TRAP)

Not categorically prohibited

A TRAP might be prohibited if it “requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred to train the worker.”

Fixed-Term Agreements

Not prohibited

“The Commission relatedly clarifies that fixed-duration employment contracts, i.e., contracts between employers and workers whereby a worker agrees to remain employed with an employer for a fixed term and the employer agrees to employ the worker for that period, are not non-compete clauses under the final rule because they do not restrain post-employment conduct”

B2B Non-Competes

Not categorically prohibited

“[T]he Commission notes as a general matter that the definition would not apply to non-competes between businesses, but

the Commission declines to opine on specific factual circumstances”

Non-Competes between Franchisors and Franchisees

Not prohibited

“[T]he final rule does not cover franchisor/franchisee non-competes”

[b]ut, per the FTC, they remain “subject to the State common law and Federal and State antitrust laws, including section 5 of the FTC Act.”

Foreign Non-Competes

Not categorically prohibited

The “final rule would not invalidate non-competes entered into by foreign companies with foreign workers unless they restrict a worker’s ability to work or start a business inside the U.S.”

Dissolution of Partnership; Dissociation of Partner from Partnership; Termination of Member’s Interest in an LLC (similar to exceptions codified in CA BP §§ 16602, 16602.5)

Not addressed

Non-Competes in ERISA-covered employee benefit plan

Not addressed