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In brief

On Tuesday this week, the Federal Trade Commission (FTC) issued its highly anticipated final rule on noncompetes, imposing a near-total ban on worker noncompetes in the United States. Barring injunctive relief from legal challenges (which have already started), the rule will take effect 120 days from publication in the federal register.

Interestingly, the rule exempts noncompete covenants entered into pursuant to a bona fide sale of a business. While “bona fide” is not defined in the final rule, the Supplementary Information for the rule explains that the FTC considered but rejected percentage and dollar minimum thresholds for the sale of business exception to weed out “exploitative and coercive” noncompetes and clarified that excepted noncompetes must be given “pursuant to a bona fide sale.” The Supplementary Information further explains that the FTC considers a bona fide sale to be one that is made between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale.


  1. What type of noncompetes are impacted?
  2. Do state laws still apply?
  3. New Ideas
  4. What about nonsolicitation agreements? Are they banned?
  5. What should companies do now?
  6. US State noncompete laws: Trending toward restrictive

In contrast, the FTC specifically calls out as problematic “springing noncompetes,” which apply to employees in the event of a sale and mandatory stock redemption or repurchase programs because the employee has no goodwill to exchange in the sale for the noncompete and no meaningful opportunity to negotiate at the time of contracting.

Nevertheless, the bona fide sale exception is broad and preserves the status quo by allowing buyers in M&A transactions to obtain noncompetes from individual sellers in circumstances where such noncompetes are otherwise permitted currently. While the pending and anticipated legal challenges to the rule are significant and place the entire rule in jeopardy, the sale of business exception is not likely to be narrowed because of these challenges.

So, what does this new regime mean for M&A?

What type of noncompetes are impacted?

The Supplementary Information confirms that the new rule does not apply to B2B noncompetes or nonsolicits. Instead, the focus of the rule is noncompetes with workers that limit their ability to work for others. So the rule does not impact current B2B agreements.

Second, the FTC repeatedly makes the point that noncompetes must meet existing state and federal law restrictions (e.g., reasonable in scope and duration; limited to the goodwill to be acquired, etc.) to be enforceable, even if they otherwise fall within the sale of business exception in the new rule. This is the case because the FTC rule creates a new floor for noncompetes by preempting more lax state rules, but it does not preempt more stringent state laws or federal antitrust restrictions. 

Do state laws still apply?

Signed Deals. The good news is that, while the FTC rule applies retroactively, prior noncompetes entered into with individual sellers remain valid if given as part of a bona fide sale of a business because the new rule only supersedes state law “to the extent that such laws would otherwise permit or authorize a person to engage in conduct” that is regulated by the final rule.

Thus, noncompetes obtained as part of a bona fide sale of a business remain valid if they otherwise already complied with state and existing federal antitrust laws. The final rule also makes clear that where a cause of action related to a noncompete clause arose prior to the effective date, the final rule does not apply. In other words, if a selling employee already has breached a sale of business noncompete, buyers can still sue.

New Deals. The same exemption analysis listed above applies. In any bona fide sale of business, the parties still must comply with state laws, which may be more restrictive than federal antitrust law. For example, in California, sale of business noncompetes are valid only when the sale is of a substantial interest in the corporation so that the shareholder, in transferring all his or her shares, can be said to transfer his or her interest in the corporation’s goodwill.

New Ideas

We expect to see an increase in partnership transactions and/or equity ownership offerings for the executives of target businesses to qualify such executives for sale of business noncompetes. Specifically, the removal of the significant ownership requirement under the sale of business exception opens the door to permissible noncompetes for option holders and lower-level employees, barring applicable state law restrictions.

What about nonsolicitation agreements? Are they banned?

The FTC’s final rule does not directly address nonsolicitation covenants. However, the Supplementary Information provides that, while the rule “does not categorically prohibit…NDAs, TRAPS (an agreement to repay training or educational expenses advanced by an employer), and nonsolicitation agreements,” an agreement “that is so broad or onerous that it has the same functional effect” as a noncompete would fall under the rule. More pointedly, under the FTC’s rule, “non-solicitation agreements can satisfy the definition of [a] noncompete clause…where they function to prevent a worker from seeking or accepting other work or starting a business after their employment end.” Note that this interpretation should not apply in the sale of business context-in a bona fide sale situation in which a noncompete is permissible under the rule, nonsolicitation covenants should be equally available (and subject to the same limitations on reasonableness as are noncompetes). But other than in the sale of a business context, the FTC’s position is that overly broad consumer nonsolicits could be challenged as functional noncompetes under the rule.

What should companies do now?

  • Until litigation over the FTC rule is resolved, we recommend a close evaluation of state law applicable to each material person to be bound by a sale of business noncompete. Below is a brief explanation of how US state noncompete law is trending.
  • Companies should ensure that noncompetes entered into with individual sellers meet the bona fide sale of business exception even before the rule takes effect and should aim to comply with applicable state law to position themselves for maximum enforceability regardless of the rule’s ultimate outcome.
  • It is common practice to consider limiting noncompetes to 3 years or less in length for maximum enforceability (though longer periods may still be enforceable), tying restrictions to the actual operation of the acquired business, and using the tax residence of individual sellers to decide which state law applies to further bolster the validity and future enforcement of noncompetes.

US State noncompete laws: Trending toward restrictive

State law is increasingly restrictive towards M&A non-competes. For example, California generally prohibits non-competes, but allows them in the sale of business context as follows:

Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.

California courts have made clear that a person must sell a “substantial interest” in the business, meaning it is clear from the transaction that the person is transferring his interest in the goodwill of the acquired business, for this exception to apply.

We note that Delaware, Illinois and New York have reasonableness-based laws where such non-competes must be reasonably tailored to legitimate business interest. Even Texas, which is generally lenient with respect to employment agreements, requires tailoring of non-competes in the M&A context.


Brian Burke is a partner in Baker McKenzie's Washington, DC office. He draws on over 20 years of experience to counsel clients on all federal antitrust issues. He assists clients in successfully navigating the merger clearance process before the US as well as international antitrust authorities. Brian also has extensive experience advising clients on civil and criminal governmental antitrust investigations, commercial antitrust litigation, antitrust compliance programs, risk assessments, and pricing and distribution policies. Brian holds multiple leadership positions in the Firm. He is a member of the Steering Committee for the Firm's North American Antitrust Practice Group, as well of the Global Antitrust and Competition Taskforces for Healthcare, Energy Mining and Infrastructure, and Consumer Goods Industries. He also serves as the co-head of the Firm's Merger-Control Task Force.


Caroline Burnett is a Senior Knowledge Lawyer with the North America Employment & Compensation Practice Group. Caroline's primarily responsibility is to make knowledge easily available to lawyers within the North America Employment & Compensation Group, increasing the quality, consistency and cost-effectiveness of the advice that Baker McKenzie gives its clients
In addition to her focus on enhancing technical standards and improving efficiency, Caroline drafts drafting pragmatic and commercially-minded thought leadership for the Firm's clients. She identifies trends and developments impacting US multinationals to enable fee-earners in her practice group to better advise their clients on managing a global workforce. In 2017, Caroline launched the Employer Report blog, which provides legal updates and practical insights to help multinational employers understand, prepare for and respond to the latest domestic and cross-border labor and employment law changes.
Before joining Baker McKenzie, Caroline practiced labor and employment law for nearly a decade at major US law firms.


Susan Eandi is the Chair of Baker McKenzie's North America Employment and Compensation Practice Group, head of the Global Employment and Labor Law Practice for North America, and a member of the North America Regional Management Council. She also serves on the Firm's Antiracism Legal Impact Board.
Susan speaks regularly for organizations including ACC, Tech GC, Silicon Valley AGC and World Business Council for Sustainable Development. Susan publishes extensively in various external legal publications in addition to handbooks/magazines published by the Firm.
Susan is a recognized leader in employment law by International Employment Lawyer, The Daily Journal, Legal 500 PLC and is a Chambers-ranked attorney.


Elizabeth Ebersole is a partner in Baker McKenzie's Global Employment and Labor Law group. She focuses her practice on cross-border employment law advice across the entire spectrum of employment issues facing multinational employers. Ms. Ebersole has been published in various external legal publications in addition to handbooks/magazines published by the Firm. She was ranked one of the top employment and labor attorneys in Chicago by Super Lawyers.


Kim Franko is a partner in the Employment & Compensation Practice Group in Baker McKenzie’s New York office and advises clients on labor and employment issues in connection with US and cross-border corporate transactions.


Arvind S. Miriyala is an associate in Baker McKenzie's North America Antitrust & Competition Practice Group in Dallas. He advises clients on all aspects of antitrust law before the Department of Justice, Federal Trade Commission, US courts, and foreign competition authorities. He also maintains a significant pro bono practice with a recent focus on antitrust issues related to occupational licensing.
He is an active member of leadership within the ABA Antitrust Section as well, having served as a Young Lawyer Representative and currently as Vice Chair for the Leadership Development Committee.
Prior to joining Baker McKenzie, Arvind was a Litigation Associate working on antitrust matters at another large international law firm. During law school, Arvind served as a judicial intern in the US District Court for the District of Columbia where he worked for the Honorable Reggie B. Walton as well as the US District Court for the District of Maryland where he worked for the Honorable Deborah K. Chasanow.


A seasoned deal lawyer, William J. Rowe is a mergers and acquisitions partner in Chicago. He guides global clients, many Fortune 100 repeat acquirers, with transformational domestic and international mergers, acquisitions, carve-outs and joint ventures. These deals range from private and public target acquisitions in the United States and around the world to complex, multi-jurisdictional acquisitions and sell side transactions.


Robin Samuel leads Baker McKenzie’s US Labor & Employment team, is co-chair of the Firm’s Workforce Redesign service line, and is a Steering Committee member for the North American Employment and Compensation practice. Robin also serves on the California offices’ leadership team. Robin is a Chambers-ranked attorney for California employment law, a Benchmark Litigation Labor & Employment Star, and a 2023 L.A. Business Journal Top 100 Lawyers award recipient. Robin is a frequent author and speaker for organizations such as SHRM, ACC, and the World Business Council for Sustainable Development.


Autumn Sharp joined Baker McKenzie in March 2020 as a Knowledge Lawyer for the Employment & Compensation Practice Group, covering all aspects of global workforce management for the North America region. She also supports the Practice Group on knowledge management matters including thought leadership projects and global surveys. Before joining Baker McKenzie, Autumn was a practicing attorney for over 15 years, advising on a broad spectrum of employment law matters.


Kathryn R. Strong is a Corporate Partner in Baker McKenzie's Chicago office. Kathryn advises clients on corporate transactions, particularly mergers and acquisitions in a cross-border context.
Prior to joining the Firm, Kathryn was an associate editor of the Northwestern University Law Review, and served as a student law clerk to US District Judge Joan H. Lefkow of the United States District Court for the Northern District of Illinois.


Jeff Sturgeon is partner in the Employment & Compensation Practice group in Baker McKenzie's New York office. A skilled advisor and litigator, Jeff assists clients with their most complex employment matters.

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