By Samantha Halem, David Wilson, Tavish Brown, John Arnold August 8, 2024
This alert provides important information for employers concerning the noncompetition agreement ban by the Federal Trade Commission (FTC), which is scheduled to go into effect on September 4, 2024, as well as a summary of a recent and surprising decision from the Massachusetts Superior Court concerning the Massachusetts Noncompetition Agreement Act (MNAA).
Federal Courts Issue Conflicting Decisions on FTC’s Noncompetition Agreement Ban[1]
On July 3, 2024, the Federal District Court for the District of Northern Texas issued a decision in Ryan, LLC v. FTC, which preliminarily enjoined the FTC from enforcing the rule against the particular plaintiff. However, the court did not issue a nationwide injunction. Based on this preliminary decision, it appeared unlikely that the FTC’s rule would survive the constitutional challenge. The court is expected to issue a final decision on or before August 30, 2024.
Then, on July 23, 2024, the Federal District Court for the Eastern District of Pennsylvania denied a request for a preliminary injunction in ATS Tree Services, LLC v. FTC, issuing a ruling that directly conflicts with Ryan, LLC, finding that the final rule is likely to survive legal challenge.
These conflicting decisions create uncertainty about the fate of the FTC’s noncompetition agreement ban, which is scheduled to go into effect on September 4, 2024, unless a nationwide injunction is issued.
Why Are They Conflicting?
The principal disagreement between the Ryan, LLC and ATS Tree courts concerns the “text, history, and structure” of the Federal Trade Commission Act (FTCA). Specifically, the question is whether Section 6(g) of the FTCA authorizes the FTC to issue “substantive” rules concerning “unfair methods of competition”.
There are also considerable questions about whether the regulation will survive the “Major Questions Doctrine,” which, as articulated in the Supreme Court’s 2022 decision in West Virginia v. EPA, requires agencies to point to “clear congressional authorization” to, among other things, regulate issues of “vast economic and political significance.”[2]
What Should Employers Do Now?
Unfortunately, the recent federal court decisions do not provide the clarity that we had hoped for regarding how employers should address their existing noncompetition agreements. Most immediately, the FTC’s noncompetition agreement ban requires employers to send notices to workers on or before September 4, 2024, who are bound by a noncompetition agreement stating that the agreements are void. While failure to send a notice is a violation of the rule, there is no private right of action under the FTCA. As such, only the FTC can enforce the noncompetition agreement ban. Additionally, the final rule provides that it is not an unfair method of competition to “enforce or attempt to enforce” a noncompetition agreement clause or to “make representations” about a noncompetition agreement clause where a person has a good-faith basis to believe that the rule is inapplicable. So, employers may be able to rely on decisions finding the final rule is unconstitutional as a defense to potential enforcement actions.
Regardless of the fate of the FTC’s noncompetition agreement ban, the final rule is consistent with a continuing legislative trend restricting the enforceability of noncompetition agreements and related restrictive covenants. Considering these trends, employers should take steps now to secure their legitimate business interests, including trade secrets, confidential information, and goodwill, by:
Massachusetts Superior Court Issues Important Decision Interpreting the Massachusetts Noncompetition Agreement Act
On July 17, 2024, a Massachusetts Superior Court issued a surprising and potentially impactful decision in Miele v. Foundation Medicine, Inc. regarding forfeiture for competition agreements, nonsolicitation agreements, and certain noncompetition agreements in separation agreements, among other post-employment restrictive covenants.
MNAA Refresher
The MNAA provides that noncompetition agreements are valid and enforceable only when they strictly comply with statutory requirements.
Among other things, an enforceable agreement must: (1) comply with specific notice requirements, including explicitly stating in the agreement that the employee has the “right” to consult with counsel before executing; (2) be supported by consideration independent from continued employment (if entered into after commencement of employment); (3) be no broader than necessary to protect legitimate business interests (i.e., trade secrets, confidential business information, and goodwill); (4) avoid restricting activities for more than one year following employment (absent unique circumstances); (5) be reasonable in geographic reach in relation to the interests protect (as defined); (6) be reasonable in scope of proscribed activities in relation to the interest protected (as defined); (7) specify in the agreement the consideration that is supporting the noncompetition agreement; and (8) be “consonant” with public policy.
For a detailed review of the MNAA’s requirements, please refer to HRW’s past alerts here and here.[3]
What does the MNAA Say About Forfeiture for Competition Agreements?
Relevant to Miele, the MNAA defines “noncompetition agreements” to include “forfeiture for competition agreements,” but not to include certain other restrictive covenants, including nonsolicitation agreements and noncompetition agreements in separation agreements. Under the MNAA, a “forfeiture for competition” agreement is defined as an agreement that, by its terms or through the way it is enforced, “imposes adverse financial consequences” on a former employee for engaging in “competitive activities” after their employment.
After the passage of the MNAA in 2018, it was commonly understood that nonsolicitation agreements, separation agreements, and other restrictive covenants explicitly excluded from the definition of a “noncompetition agreement” did not need to comply with the MNAA. As discussed, Miele appears to change that understanding.
Miele v. Foundation Medicine
Susan Miele was the former head of human resources for Foundation Medicine, Inc. (FMI). When she joined FMI in 2017, Miele entered into a nonsolicitation agreement with FMI that prohibited her from soliciting employees of FMI for one year following the end of her employment.
When FMI terminated Miele’s employment in 2020, the parties entered into a Transition Agreement where Miele agreed to remain with FMI for a set transition period in exchange for increased compensation and equity benefits. The Transition Agreement “reaffirmed” the 2017 agreement and provided that if Miele violated the nonsolicitation agreement, she would have to return the benefits received under the Transition Agreement and FMI would be permitted to withhold benefits not yet paid.
After the transition period ended, Miele allegedly solicited several FMI employees on behalf of FMI’s competitor. FMI responded by halting benefits to Miele under the Transition Agreement and litigation ensued. After discovery, both parties moved for judgment on their claims.
What Did the Miele Court Say?
The relevant issues before the court were: (1) whether the “reaffirmation” of the 2017 agreement in 2020 brought that agreement within the ambit of the MNAA;[4] (2) whether the Transition Agreement was a new agreement; and (3) whether the Transition Agreement was a “forfeiture for competition agreement” as defined by the MNAA and, if so, whether it complied with the MNAA.
With respect to the forfeiture questions, the court concluded that because the Transition Agreement contained new terms and provided new benefits to Miele, it constituted a new nonsolicitation agreement that had to comply with the MNAA but did not, and, therefore, was unenforceable.
In considering these questions, the court observed that the MNAA defines “noncompetition agreements” to include “forfeiture for competition agreements,” but excludes nonsolicitation agreements and noncompete agreements in applicable separation agreements from the definition of “noncompetition agreement.” Thus, because a nonsolicitation agreement with a forfeiture provision meets the definition of “forfeiture for competition agreement,” the plain language of the MNAA creates an inherent contradiction where such a nonsolicitation agreement is both included and excluded from the definition of a noncompete agreement. To resolve this contradiction, the Miele Court noted that courts must read statutes in harmony and not to create internal contradictions. Thus, the Court concluded that the legislature must have intended to only exclude nonsolicitation agreements and other restrictive covenants from the definition of noncompetition agreements if they do not contain forfeiture provisions.
In short, under the Miele decision, if a restrictive covenant requires an employee to forfeit benefits received for engaging in competitive activities, it is deemed to be a noncompetition agreement under the MNAA, regardless of the MNAA language excluding certain restrictive covenants, such as nonsolicitations, from the definition of a noncompetition agreement.
Miele Takeaway(s)
Moving forward, employers who wish to include a forfeiture provision in a restrictive covenant agreement should be prepared for a Court to conclude that the MNAA applies, regardless of the nature of the restrictive covenant.
Miele is not all bad news for employers. The discussion regarding the retroactivity of the MNAA is the first of its kind and is important to any employer with pre-MNAA noncompetition agreements. Additionally, in the decision, the court rejected Miele’s argument that she had not materially breached her nonsolicitation agreement because the individuals she allegedly solicited were low-to-mid-level employees and, according to Miele, FMI did not have a legitimate business interest in protecting goodwill associated with those employees. In rejecting that argument, Miele reaffirms goodwill as a legitimate business interest at a time that courts and administrative agencies are increasingly questioning whether goodwill should receive the same degree of protection as trade secrets and confidential information.
Next Steps
Employers should immediately review all restrictive covenants with Massachusetts residents to determine if the agreements comply with the MNAA. Moving forward, to avoid legal challenges, employers should take care to ensure that any restrictive covenant including a forfeiture provision complies with the MNAA.
Questions?
If you have any questions about the above new developments or any other compliance issue, do not hesitate to reach out to the lawyers below or any other member of our team.
[1] For a refresher on the FTC’s final rule and what employers must do to comply should it go into effect, please review Hirsch Roberts Weinstein’s client alert discussing the regulation here.
[2]According to the FTC, approximately 30 million workers are bound by noncompetition agreements.
[3]Please note past alerts do not reflect developments in the law since they were published and are being provided for background purposes only. Please consult with counsel regarding any questions about compliance with the MNAA.
[4]The MNAA does not apply to noncompetition agreement agreements entered before October 1, 2018. Miele’s 2017 agreement did not comply with the MNAA, so, if the reaffirmation brought the agreement within the bounds of the MNAA, the 2017 agreement would be void and Miele would have prevailed on the related claims. The Miele Court concluded that the MNAA is not retroactive and, therefore, the “reaffirmation” did not affect FMI’s ability to seek damages arising from any breaches of the 2017 agreement.
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