Summary: the legal question may become less complicated as the new Congress and President take office, but employers should still move with caution when requiring employees to execute non-compete agreements.

At the federal level

In further explanation, in early 2024, the Federal Trade Commission (“FTC”) issued a Final Rule that made most employee non-compete agreements/clauses unlawful. The exceptions involved circumstances where non-compete agreements were/are executed pursuant to the sale of a business and with regard to non-compete agreements with senior executives (those earning $151,000+).

In August 2024, a federal court in Texas issued a ban on the enforcement of the FTC’s Final Rule. The court’s injunctive Order applied nationally even though at least three other federal courts had issued opinions disagreeing with the legal reasoning of the Texas court. The Texas injunctive Order is on appeal, which may lead to a Circuit Split or resolution by the Supreme Court. The specific legal question is whether the FTC had/has the statutory authority to issue the Final Rule.

In the meantime, the National Labor Relations Board (“NLRB”) entered the arena. In June 2024, an administrative law judge (“ALJ”) for the NLRB held that an employer’s non-compete agreement was void since it interfered with the relevant employee’s ability to engage in “concerted activity” protected by federal labor laws. For similar reasons, the ALJ also voided the company’s non-solicitation agreement. See, In re J.O. Mory, Inc., 25-CA-336995 (NLRB 2022).

To summarize, at the federal level, the FTC’s Final Rule has been voided (for now), but an NLRB ALJ has issued an opinion stating that non-compete (and non-solicitation) agreements can violate the National Labor Relations Act.

The election effect

There is a political element to the legal efforts to restrict the impact of non-compete agreements. Those with left-leaning politics tend to dislike non-compete agreements, while the opposite is true for those with right-leaning politics. Thus, efforts to curtail the impact of non-compete agreements are not surprising given the political leanings of the current federal administration. However, a politically right-leaning administration will enter office in January 2025. Such may well influence or eliminate efforts to ban non-compete agreements by federal authorities. For example, the new administration has nominated a new Chairman of the FTC. The new administration will also have the opportunity to nominate members of the NLRB.

At the State level

The legality and enforceability of non-compete agreements have normally been a function of State law. Many States have laws that ban enforcement of non-compete agreements, and every jurisdiction has various statutory and judicially-imposed limitations and requirements. For example, most States require that a non-compete agreement be geographically circumscribed and short in term.

Thus, for now, State laws regain their preeminence when an employer seeks to require non-compete agreements/clauses from their employees.

State-by-State Non-Compete Law: What Employers and Employees Need to Know

Because the FTC’s Final Rule has been enjoined and the incoming administration is unlikely to pursue aggressive non-compete enforcement at the federal level, state law has reasserted primacy in this area. The landscape varies dramatically by jurisdiction, and both employers seeking to enforce non-compete agreements and employees seeking to escape them must understand the applicable state rules.

States With Outright Bans or Near-Bans

Several states have essentially eliminated non-compete agreements for employees:

• California. Under California Business and Professions Code §§ 16600 et seq., non-compete agreements with employees are void and unenforceable as a matter of law, with only narrow exceptions for the sale of a business. California employers cannot even require employees to sign non-compete agreements, and the 2023 amendments to Section 16600 clarified that this prohibition applies regardless of where the employee signed the agreement or where the employer is located — if the employee lives or works in California, the ban applies.
• Minnesota. Effective January 1, 2023, Minnesota Statutes § 181.988 voids all non-compete agreements with employees and independent contractors. The prohibition applies retroactively to agreements signed before the effective date.
• Oklahoma. Oklahoma Statutes §§ 15-219A et seq. void non-compete agreements except in the sale-of-business context.
• North Dakota. North Dakota Century Code § 9-08-06 similarly voids non-compete agreements with employees, with exceptions only for dissolution of a partnership and sale of a business.

States With Enforcement — But With Significant Limitations

Most states permit non-compete agreements but impose requirements that courts enforce strictly:

• Reasonable geographic scope. Courts in most jurisdictions will not enforce a non-compete that prohibits an employee from working in any industry anywhere in the world. Geographic restrictions must be tied to the territory where the employee actually had customer contact or competitive impact on behalf of the employer.
• Reasonable duration. Courts consistently strike non-competes exceeding two years. One year is generally more defensible; six months is the safest duration for most employees below the senior executive level.
• Protectable interest. Non-compete agreements must protect a legitimate business interest — typically trade secrets, confidential customer relationships, or specialized training provided by the employer. A non-compete protecting nothing more than an employer’s general competitive position will be unenforceable in most jurisdictions.
• Adequate consideration. In many states, including Illinois and Texas, a non-compete signed at the beginning of employment is supported by the job offer itself as consideration. However, a non-compete presented to an existing employee without additional consideration — a raise, a promotion, a signing bonus — may not be enforceable.

Blue-Penciling vs. Reformation

When a court finds a non-compete agreement overbroad, it may respond in one of three ways. Some courts “blue-pencil” the agreement, striking the offending provisions and enforcing what remains. Other courts “reform” or “modify” the agreement, rewriting the overbroad provisions to create an enforceable scope. A minority of courts — including those in some jurisdictions — refuse to enforce the agreement at all if it is overbroad, on the theory that employers should not be rewarded for overreaching. Understanding which approach governs in your state is critical to drafting enforceable agreements and to assessing the risk of a court rewriting terms in the employer’s favor.

Non-Solicitation Agreements: A Practical Alternative

Even in jurisdictions skeptical of broad non-compete agreements, non-solicitation agreements — which prohibit a departing employee from soliciting the employer’s customers or fellow employees rather than broadly restricting competition — are generally more enforceable. For most employers, a well-drafted non-solicitation agreement combined with a strong confidentiality and trade secret agreement provides substantially the same business protection as a non-compete, with significantly less legal risk. The NLRB’s ruling in In re J.O. Mory noted above is an important exception: in unionized workplaces or workplaces where employees have engaged in protected concerted activity under the NLRA, even non-solicitation agreements can face challenge.

Whether you are an employer drafting restrictive covenant agreements or an employee who has been presented with one, the analysis is highly fact-specific and jurisdiction-specific. Contact the Business attorneys at Revision Legal or visit our business law practice page to discuss your situation.

Contact the Business Attorneys at Revision Legal

For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.