Non-Compete Agreement Reform: Preparing for a Changing Legal Landscape

Non-compete agreements are under increasing legal scrutiny at both the federal and state level. The Federal Trade Commission has signaled interest in broadly restricting or banning non-competes, and numerous states have already enacted significant limitations. Employers who rely on non-compete agreements should understand the evolving landscape and prepare alternative strategies for protecting legitimate business interests.

The Current State of Non-Compete Law

Federal developments

The FTC has proposed rulemaking that would broadly prohibit non-compete clauses in employment agreements. While the final rule's scope and timeline remain uncertain, the direction of federal policy is clearly toward restriction. Employers should plan as if significant limitations are likely.

State-level restrictions

States are moving in the same direction, though at different speeds:

States that ban or severely restrict non-competes:

• California has long prohibited non-compete agreements for employees (with very narrow exceptions)
• Oklahoma and North Dakota similarly prohibit most non-competes
• The District of Columbia enacted a near-total ban effective October 2022
• Minnesota enacted a broad ban effective July 2023

States with significant limitations:

• Many states restrict non-competes for employees below a salary threshold (often in the range of $75,000-$100,000 annually)
• Several states limit duration (commonly 12 months maximum)
• Some states require advance notice before requiring a non-compete (e.g., providing the agreement before the start date or with a specified notice period)
• A number of states require additional consideration beyond continued employment for existing employees asked to sign non-competes
• Some states prohibit non-competes for specific categories of workers (healthcare workers, low-wage workers, independent contractors)

Enforceability factors

Even in states without specific non-compete statutes, courts evaluate enforceability based on:

• Whether the restriction protects a legitimate business interest
• Whether the scope is reasonable in duration, geography, and activity
• Whether adequate consideration was provided
• Whether the restriction imposes an undue hardship on the employee

Legitimate Business Interests Worth Protecting

Before restructuring your approach, clarify what you actually need to protect:

• Trade secrets: Proprietary formulas, processes, source code, algorithms, and other confidential technical information
• Confidential business information: Customer lists, pricing strategies, business plans, financial data, and strategic initiatives
• Customer relationships: Relationships built on the employer's investment and goodwill, particularly where the employee had direct access to customers
• Specialized training investment: Skills or knowledge the employer invested significantly in developing that would benefit a competitor

Alternative Protective Agreements

As non-competes become restricted, alternative agreements gain importance:

Non-solicitation agreements

Prohibit former employees from soliciting the employer's customers or employees for a defined period:

• Generally more enforceable than non-competes because they are narrower in scope
• Directly protect the most tangible business interest (customer and employee relationships)
• Should specify which customers are covered (those the employee had contact with or knowledge of)
• Duration of 12-18 months is typically reasonable

Non-disclosure agreements (NDAs)

Prohibit the use or disclosure of confidential information and trade secrets:

• Protect the information itself rather than restricting the employee's future employment
• Should clearly define what constitutes confidential information (overly broad definitions reduce enforceability)
• Do not need a time limit for trade secrets (protection lasts as long as the information remains a trade secret)
• Should specify obligations for returning or destroying confidential materials upon departure

Intellectual property assignment agreements

Ensure that work product created during employment belongs to the employer:

• Particularly important for technology, creative, and R&D roles
• Must comply with state-specific inventor rights laws (many states prohibit assignment of inventions created on the employee's own time without company resources)
• Should clearly define what types of work product are covered

Garden leave provisions

Require a departing employee to provide extended notice (typically 30-90 days) during which they continue to receive pay but are relieved of duties:

• The employer pays for the restriction, which courts view favorably
• Provides time to transition relationships and secure confidential information
• The employee is not prevented from future employment, only delayed

Updating Your Practice

Audit existing agreements

• Review all current non-compete agreements for compliance with applicable law
• Identify agreements that may be unenforceable under current or anticipated rules
• Determine which employees genuinely need restrictive covenants and which have them unnecessarily

Adopt a tiered approach

Not every employee needs the same restrictions:

• Senior leaders with strategic knowledge: Strongest appropriate protections (non-solicitation, NDA, potentially garden leave)
• Customer-facing roles: Non-solicitation focused on their specific customer relationships, plus NDA
• Technical roles with trade secret access: Strong NDA and IP assignment agreements
• General employees: NDA only, covering legitimately confidential information

Strengthen operational protections

Legal agreements are one layer of protection. Operational measures provide additional security:

• Limit access to confidential information on a need-to-know basis
• Implement technology controls (access logging, data loss prevention, access revocation upon departure)
• Conduct thorough exit procedures including return of materials and reminders of ongoing obligations
• Maintain relationships with key customers so they are connected to the organization, not just one employee

Consult legal counsel

Given the rapidly changing landscape, have an employment attorney review your restrictive covenant program annually. An agreement that was enforceable last year may not be enforceable today.

The trend toward non-compete reform is clear and unlikely to reverse. Employers who proactively shift to alternative protections will be better positioned than those who continue relying on agreements that may be unenforceable when tested.