Reed Smith Client Alert

In a July 2021 executive order, President Joe Biden directed the U.S. Federal Trade Commission (FTC) to explore potential ways to limit the use of non-compete agreements. Pursuant to that directive, the FTC on January 5, 2023 issued a proposed rule that would effectively ban the use of such agreements with U.S. workers. Given the customary use of restrictive covenants in private equity transaction documents, it is important to understand how this proposed rule may affect enforceability of such covenants and to what extent it should be considered when negotiating private equity transaction documents.

At its core, the FTC’s proposed rule deems it an unfair method of competition for an employer to:

  • Enter into or attempt to enter into a non-compete clause with a worker;
  • Maintain a non-compete clause with a worker; or
  • Represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable clause of that kind.

The proposed rule would bar future workplace non-compete clauses with any paid or unpaid workers, including employees, independent contractors and interns. It would also invalidate any preexisting non-compete clauses and would in fact require business to (i) rescind such clauses and (ii) notify workers of the same in an individualized written communication. The same notification requirements would likewise apply with regard to former workers who remain bound by non-compete clauses, so long as the employer has the worker’s contact information readily available.

Notably, however, there is an exception – albeit a limited one – to the FTC’s proposed rule. Specifically, the FTC carves out non-compete agreements that are “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.”