Noncompete Covenants in M&A: Buyer and Seller Considerations

This CLE course will offer guidance in drafting noncompete clauses for both sellers and key employees in connection with the purchase and sale of a business. The panel will discuss the status and implications of the now-abandoned FTC rule banning noncompetes, other FTC risks, and evolving state noncompete laws. The panel will also review recent case law regarding the enforceability of noncompetes and discuss the impact of certain unique buyer and seller circumstances and how noncompetes can be tailored to address them.

Noncompete covenants in M&A transactions operate in two distinct legal frameworks: the sale-of-business context, where permissive reasonableness standards apply, and the employment context, where state law ranges from full enforcement to outright prohibition. Failing to appreciate these distinctions and draft around them exposes buyers to unenforceable covenants and exposes sellers and their staff to covenants that exceed legal authority. This makes noncompete covenants critical, especially because they are vulnerable to post-closing judicial scrutiny.

The FTC's 2024 Noncompete Rule banned noncompetes but preserved the sale-of-business exception. The FTC rule is now enjoined by federal court order as of April 2026. In its absence, state law continues to govern employment noncompete enforceability. But the FTC rule, even in an enjoined state, influences the legal and regulatory environment around noncompetes. State attorney general scrutiny of employment noncompete enforcement is on the rise. And the FTC's unfair competition authority remains a background risk for overly broad employment noncompetes, particularly in industries with significant worker power concerns.

Most states continue to distinguish between the law governing covenants not to compete when incident to the sale of a business versus when these covenants arise solely out of employment. This means that noncompete covenants applicable to sellers in an M&A transaction must be approached differently than those applicable to key employees of the acquired company. With respect to sellers, the presence of reasonable consideration and a clear nexus between that consideration and the covenant is essential. As it relates to key employees, courts generally respect restrictive covenants in employment agreements for the duration of employment, and noncompetes can survive the term of employment for certain key employees if drafted to comply with new federal and existing state law.

In addition to enforceability issues, the appropriate contours of noncompetition restrictions are highly fact-dependent and require careful consideration of the circumstances of each individual buyer and seller. Failing to tailor noncompetition covenants to these circumstances can result in a seller being unreasonably restricted from future endeavors and/or a buyer being inadequately protected.

Listen as our authoritative panel analyzes covenants not to compete in M&A transactions.