What Fund Managers Should Know About the FTC’s Proposed Ban on Non‑Compete Provisions

The use of non-compete provisions and other restrictive covenants, such as client, investor and employee non-solicitation covenants, has long been an important tool used by hedge funds and other asset managers to protect confidential information and trade secrets; valuable client relationships; and goodwill. Such covenants, proponents argue, create incentives for employers to invest in key employees and to promote stability in relationships between investors and their advisors. Increasingly vocal detractors, on the other hand, assert that such covenants stymie employee mobility and depress wages. Although non‑compete agreements have been subject to increasing scrutiny at the state level in recent years, particularly as to non-management employees, federal regulation of restrictive covenants has been extremely limited. On January 5, 2023, however, the Federal Trade Commission (FTC) announced its intention to effect a sea change in this area, issuing a Notice of Proposed Rulemaking (Proposed Rule) that, if implemented, would prohibit the use of non‑compete clauses with employees in virtually all circumstances. The FTC is accepting comments on the Proposed Rule, including potential alternative rules, through March 20, 2023. This guest article by Dechert attorneys J. Ian Downes and Jeffrey W. Rubin discusses the FTC’s Proposed Rule; the backdrop against which it was raised; the challenges to enactment of the Proposed Rule in its current form; and the steps that asset managers should consider now in the face of legal headwinds that, at the very least, seem likely to lead to increasing scrutiny of the use of restrictive covenants. For additional insights from Downes and Rubin, see “Legal and Practical Impact on Fund Managers of New Federal Law Ending Forced Arbitration of Sexual Harassment and Assault Claims” (Jul. 14, 2022).

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