The FTC New Rule on Non-competition Agreements. What does it mean for your business?
In April of 2024, the Federal Trade Commission (“FTC”) announced that the FTC rule banning non-competition agreements for workers is going into effect on September 4, 2024. The rule seeks to forestall companies from entering into non-competition agreements with workers in the interest of making sure that competition for work is not unfair to employees. The rule will have retroactive effect for non-senior executives. Companies are required to provide notice to those employees that the non-competition agreements will not be enforced. Existing non-competition agreements with senior executives will remain in effect, but the ban prevents entering into these agreements with senior executives after September 4, 2024.[1] The rule will supersede/preempt state laws only where a state law conflicts with the federal law. However, state laws that provide more rights to employees will not be preempted. As for Massachusetts, which has the Massachusetts Non-Competition Agreement Act (“MNAA”), the federal law preempts the MNAA because the FTC rule provides greater rights to employees. The MNAA states, among other things, that non-competition agreements for exempt employees must be necessary to protect a legitimate business reason, be narrowly tailored to protect that interest, and must be limited in geographical scope and duration. With few exceptions, the FTC rule outright bans non-competition agreements. However, though the FTC rule allows for the enforcement of existing non-competition agreements for senior executives, the MNAA would still apply to those non-competition agreements. As such, in Massachusetts, a company may still enforce an existing non-competition agreement it has with a senior executive, as long as the agreement is necessary for a legitimate business reason, and reasonable in scope and duration (and must not be against public policy and must supported by consideration (something of value)).
Though the FTC rule is set to take effect in September, there have been many challenges to the rule across the federal circuits. As such the future of the rule is currently undetermined.
What does that mean for your business? For Massachusetts businesses this means that you should revisit your existing non-competition agreements and other contracts that have these provisions embedded therein to assess the extent of the company’s vulnerability. Companies should also assess the purpose for which they included the non-competition agreements into employee agreements in the first instance and seek another way to protect that purpose. For example, if the purpose is for the protection of trade secrets, then a company should make sure that the confidentiality provisions are sound or seek to execute stand-alone confidentiality agreements; as well as to check existing practices and protocols that are utilized to keep these trade secrets safe. It is important to know that for these new agreements to withstand legal scrutiny there are differences between executing new agreements for current employees and for new employees. Further, there are many ways a company can protect its legitimate business interests. A business should partner with its attorney to determine alternatives to protecting those interests. Even if the FTC ban gets struck down by the courts, it never hurts to have additional protections in place for a company’s valuable trade secrets.
For more information you can reach out to Tanzi Cannon at General Counsel by Cannon, PLLC. Or go to www.GCbyCannon.com.
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[1] The final rule also defines the term “senior executive” to refer to workers earning more than $151,164 in the preceding year who are in a “policy-making position.” The final rule defines “policy-making position” as a business entity’s president, chief executive officer or the equivalent, and any other officer of a business entity who has policy-making authority. It defines “policy-making authority” as final authority to make policy decisions that control significant aspects of a business entity or a common enterprise.