'Prepare for all scenarios': Mass. businesses brace for federal ban on noncompetes

The Federal Trade Commission recently voted to ban noncompete agreements nationwide — a move that has triggered legal challenges and left business leaders grappling with uncertainty about a tool used by many companies.

Noncompete agreements prohibit an employee from going to work for a competitor for a period of time after leaving a job. Some business leaders say noncompetes help protect companies' intellectual property, while others say such agreements restrict talent. The FTC rule, which is slated to take effect in September, bans all new and existing noncompetes — though there is an exception for existing agreements with senior executives.

Noncompetes are used in a variety of industries but especially in the tech and biotech sectors  — which boast more than 500,000 workers in Massachusetts.

Ari Glantz, executive director of the New England Venture Capital Association, said he's "excited" about the FTC's ban and believes it will make Massachusetts more competitive.

"Talent wants to be free, and innovation economies prosper when there's a free flow of ideas," Glantz said. "That is something that catalyzes innovation, it catalyzes company creation, and it also benefits workers."  

Without noncompete clauses, Glantz argued companies will embrace alternative strategies to attract and retain workers, such as higher pay and better job perks.

The ban on noncompetes could also allow more workers to leave a company and start their own firms, according to Jennifer Tosti-Kharas, a professor of management at Babson College.

"I think we would expect to see more startups by all kinds of people," Tosti-Kharas said. "It will increase overall competition, but that's not necessarily a bad thing. I mean, competition is what pushes companies to perform better."

About one in five workers in the U.S. are bound by noncompetes, according to the FTC, which estimates that a ban would result in the creation of more than 8,500 new businesses every year.

In Massachusetts, a partial ban is already in place. The measure, passed in 2018, was the culmination of years of debate and legislative efforts. Under the Massachusetts statute, noncompete agreements are limited to one year for most workers, and can't be used for workers entitled to overtime pay, often hourly employees earning minimum wage.

Sam Larson, the vice president of governmental affairs at Associated Industries of Massachusetts, the state's largest business group, said the state law "strikes a very fair balance for both employers and employees," and he's "disappointed" the FTC moved to implement a national ban. He thinks the ban could hurt a competitive edge the state's policy currently provides to Massachusetts companies.

"We're always trying to attract top tier talent, and one of the advantages we had is that the noncompetes in Massachusetts were very limited compared to the way they are treated in other states," Larson said.

Greater Boston Chamber of Commerce CEO Jim Rooney said the FTC's ban undermines the "nuanced legislative process" Massachusetts took.

"Ensuring that businesses can compete should be our priority — instead of adopting unnecessary, far-reaching policies that weaken our competitiveness," Rooney said in a statement.

Noncompete agreements have "not been a hindrance to us to get talent," said Brittany Greenfield, the founder and CEO of cybersecurity startup Wabbi. But, Greenfield said, a ban will make things more difficult for startups because they often rely on advisory boards and contractors who are privy to proprietary information that could damage a company if it were shared with a competitor.

"And I think this now puts startups specifically in a place where we now have to be even more cautious about how we work with people. It may even limit some groups for us," Greenfield said.

Many experts and business leaders believe the FTC's ban on noncompetes will likely lead to companies using other types of contracts, especially with senior executives.

"I do think in place of a noncompete, you will either see an increase in confidentiality agreements — and I don't know if you can make them stronger — and potentially an increase in trade secret cases," said Sara Fraim, the CEO of the Massachusetts Technology Leadership Council.

Other alternatives include nondisclosure agreements and nonsolicitation agreements, though Fraim said tech companies tend to be more concerned about having noncompete agreements in place with senior executives than other employees.

The FTC's ban on noncompetes still has to survive legal challenges. Shortly after the FTC's decision, the U.S. Chamber of Commerce and other business groups filed lawsuits that argue the agency doesn't have the authority to ban noncompetes.

"I would not be surprised to see this in litigation for years," said David Brody, an employment attorney and president of the Massachusetts Employment Lawyers Association.

Brody said the issue could wind its way through different courts, possibly even the U.S. Supreme Court, and businesses will likely take a "wait and see approach" Brody said.

In the meantime, some business leaders said they are conferring with legal counsel and taking a closer look at their employee contracts.

"What we've been telling our members is to prepare for all scenarios," said Larson of AIM, the business association. "Just because it's being challenged in court doesn't mean it will be invalidated."