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FTC Bans Non-Competition Agreements, But Challenges Expected

By April 26, 2024No Comments

The Federal Trade Commission (FTC) announced a final rule on April 23, 2024, that, if it goes into effect, will ban almost all employee non-competition agreements. The rule would not bar non-competition agreements entered into as part of the bona fide sale of a business, and would not affect existing agreements for a narrow class of “senior executives,” as defined by the rule.

As present, Massachusetts restricts non-competition agreements entered into during or at the start of employment, but does not outright ban them. Under M.G.L. c. 149, § 24L, such non-competition agreements are enforceable only as to workers who are exempt from federal overtime requirements. The agreements also cannot be enforced when employees are terminated without “cause,” including by layoff. Existing Massachusetts law also prohibits non-competition agreements in certain professions, including physicians. Further, under Section 24L, employers must pay “garden leave” – i.e. half the employee’s salary for the non-competition period or other mutually agreed upon consideration. Employers also must meet certain formal rules, including notice provisions.

Section 24L, however, exempts non-competition agreements before October 1, 2018, as well as those entered into upon separation, for example in a severance agreement. It also does not prohibit non-competition agreements among a sizeable group of workers, so long as the formal requirements of the statute are met. Despite Section 24L, it is not uncommon for employers to impose non-competition agreements on Massachusetts employees that do comply with Section 24L, and then to “reaffirm” those otherwise unenforceable agreements in separation agreements, thereby rendering them likely enforceable, even without payment of garden leave. Employees may be unaware that the non-competition agreement they signed on the job is not enforceable under Section 24L. At the same time, however, the threat of legal action may deter them from seeking or accepting other employment.

The FTC’s rule is far more expansive than Massachusetts law. Under the FTC rule, it will be an “unfair method of competition” for an employer to impose or attempt or threaten to enforce an illegal non-competition agreement. Likewise, employers would be required to affirmatively inform employees that their non-competition agreements will not be enforced. In adopting the rule by a 3-2 vote, the FTC highlighted concerns that non-competition agreements impair worker mobility and restrict competition unfairly, to the detriment of working conditions and wages, and burgeoning small businesses. According to the FTC, approximately 1 in 5 workers in the United States, or 30 million people, are subject to a noncompete.

The rule is scheduled to go into effect 120 days after publication in the Federal Register; however, efforts to block it through litigation are already underway. For example, just the day after the FTC announced the final rule, the U.S. Chamber of Commerce brought suit in the U.S. District Court for the Eastern District of Texas, seeking declaratory and injunctive relief. According to the Chamber of Commerce and other industry groups, the rule exceeds the FTC’s powers and will be detrimental to businesses.

Bennett & Belfort will continue to monitor the FTC’s rule and litigation on this topic, along with other important topics that impact our business and employment law practice. Employees and businesses with concerns about their non-competition agreements are encouraged to seek legal counsel.

Disclaimer: Bennett & Belfort PC publishes the Docket blogs for informational purposes only and they do not, and are not intended to, constitute legal advice.  Please feel free to contact us if you have any questions or concerns about your own individual circumstances.