Definition and FTC update about noncompete agreements
Legal terms • contract • noncompete agreement
According to Black’s Law Dictionary, a noncompete agreement (covenant not to compete) is:
“A promise, usually in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer. Noncompetition covenants are valid to protect business goodwill in the sale of a company. In employment contexts, requiring the employee, after leaving the employment, not to do a particular type of work, they are disfavored as restraints of trade. Courts generally enforce them for the duration of the relationship, but provisions that extend beyond that relationship must be reasonable in scope, time, and territory. Also termed noncompetition agreement; noncompete covenant; restrictive covenant; covenant in restraint of trade; promise not to compete; contract not to compete.”
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FTC rulemaking update
One of two types of non-compete agreements is now banned, according to an Federal Trade Commission (FTC) final ruling issued in April, 2024:
The rule generally bans non-competes other than:
- Existing non-competes for senior executives. However, employers are prohibited from entering into or enforcing new non-competes with senior executives.
- Non-competes for the bona fide sale of a business entity. This is the other type of non-compete agreement, in which a business owner selling their company agrees not to compete with the new owner within set time and distance limits.
Historically, state law has governed worker non-competes. Recently, the Biden administration and federal regulators have embarked on efforts to ban or severely limit these agreements. The rule declares that an entity under the FTC’s authority engages in unfair competition if it enters into, attempts to enter into, or enforces a non-compete clause.
The rule is set to take effect on Sept. 4, 2024. However, legal challenges have already emerged. The U.S. Chamber of Commerce filed a lawsuit the day after the FTC issuance, calling the ruling “a dangerous precedent for government micromanagement and will harm employees, employers, and the economy.”
This lawsuit and other legal challenges could delay the ban or prevent it from taking effect. Regardless of the outcome of the legal challenges, the rule’s issuance makes clear that the FTC intends to aggressively challenge non-compete clauses that it views as unfair methods of competition.
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