On April 23, 2024 the Federal Trade Commission issued a final rule banning certain noncompetition agreements in the United States.
Many clients have been asking how this new rule impacts noncompetition agreements entered into in connection with the sale of a business. Answer: Under § 910.3 (a) of the rule, the FTC decided not to ban “a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”
However, for many Massachusetts transactions, the Massachusetts Noncompetition Agreement Act, M.G.L. c. 149 will also apply. Under § 24L (a) of that Act, the following agreements are not subject to the Massachusetts limitations on noncompetition agreements: “noncompetition agreements made in connection with the sale of a business entity or substantially all of the operating assets of a business entity or partnership, or otherwise disposing of the ownership interest of a business entity or partnership, or division or subsidiary thereof, when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal.” While the FTC considered but declined to adopt provisions similar to the “significant owner” and “significant consideration” tests these more restrictive provisions remain the law in Massachusetts.
Assuming the FTC rule goes into effect**, both the Massachusetts and the federal noncompete provisions should be evaluated to determine whether an exception applies, but for many transactions, noncompetition agreements will remain an important tool for Massachusetts business buyers and sellers seeking to structure a deal.
(Trade secret laws and non-disclosure agreements [NDAs] are also not covered by the FTC rule and both will therefore continue to provide businesses with other options for the protection of their proprietary and other sensitive information.)
**According to the FTC and federal rulemaking procedure, the rule will go into effect 120 days after publication in the Federal Register. However, there are legal challenges to the rule now pending.
Robert Finkel has more than 25 years of experience in business and corporate law, employment law, real estate law, and non-profit law. Working with entrepreneurs, Robert has substantial experience assisting clients with the launch and growth of their businesses. Robert enjoys working closely with clients to help bring their transactions to a successful conclusion, whether it’s the purchase, financing, or sale of a business; business succession planning; the purchase, leasing, refinance or sale of real estate; or other transactional, contractual or employment matters.
A founding partner of KCL, Robert is Chair of the firm’s Emerging Company Finance and Non-Profit Practice Groups and is a member of the firm’s Executive Committee.