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Effective September 4, 2024, the Federal Trade Commission (FTC) Invalidated Most Covenants Not to Compete.

On Behalf of | Jul 3, 2024 | Firm News

  • Noncompete clauses with Senior Executives entered into before September 4, 2024, are grandfathered under the Federal Rule. However grandfathered Senior Executive noncompete clauses are still subject to restrictions under State laws.
    • Under the Rule, a Senior Executive is anyone earning more than $151,164 and who is in a “policy making position”.
  • Noncompete clauses for Senior Executives are still subject to restrictions under State Law. Laws vary between States, however, here are typical State Law requirements:
    • First, the covenant must either be included in a legally enforceable contract, such as an employment agreement or agreement for sale of a business, or be a legally enforceable contract itself.
    • Second, the covenant must comply with specific restrictions under applicable state law.
      • A covenant not to compete is a restraint on trade. Depending on the facts and circumstances, courts in most states are reluctant to enforce it.
      • Many states have specific laws defining what restrictions are valid in an enforceable covenant not to compete.
      • Typically:
        • The party seeking to enforce the covenant must prove a legitimate business interest that is worth protecting.
        • The duration of the restricted period must be reasonable; not too long.
        • The territory and scope of the restriction must be reasonable; not overbroad.
        • A covenant not to compete restricting an individual to engage in his or her profession or usual line of work will likely not be enforceable if the duration is more than a year – often even shorter duration.
        • A covenant not to compete entered into in connection with the sale of a business will generally be enforceable for a longer time – sometimes as much as 3 to 5 years – to protect the goodwill value of the purchased business.