Noncompete Agreement Issues for Technology Companies

The Shifting Noncompete Landscape

Technology companies have historically relied on noncompete agreements to protect proprietary information and retain talent. However, the legal landscape has shifted dramatically in recent years. Several states have enacted laws restricting or banning noncompete agreements, and federal regulatory efforts have added further uncertainty.

California has long prohibited noncompete agreements under Business and Professions Code Section 16600, making them void and unenforceable with very limited exceptions. Other states including Oklahoma, North Dakota, Colorado, Minnesota, and Washington have enacted significant restrictions. Oregon limits noncompetes to employees earning above a specified income threshold and restricts their duration to 18 months.

State-by-State Restrictions

The patchwork of state laws creates complex compliance challenges for technology companies with distributed workforces. Colorado's law, effective August 2022, prohibits noncompetes for employees earning below a certain threshold adjusted annually and requires separate agreements signed by the employee. Illinois prohibits noncompetes for employees earning $75,000 or less annually and requires the employee to receive adequate consideration.

Washington State limits noncompetes to employees earning over $100,000 annually (adjusted for inflation), caps their duration at 18 months, and requires employers to disclose the terms at or before the time of hiring. Companies must determine which state's law applies to each employee, considering both the employer's location and the employee's work location.

Protecting Intellectual Property Without Noncompetes

Tech companies can protect their interests through alternatives that face fewer legal challenges. Non-solicitation agreements, which prohibit departing employees from recruiting former colleagues or soliciting clients, are enforceable in most states. Non-disclosure agreements protecting trade secrets and confidential information remain broadly enforceable nationwide.

Invention assignment agreements ensure that intellectual property created during employment belongs to the employer. However, several states including California, Delaware, Illinois, and Washington require employers to exclude inventions developed entirely on the employee's own time without using company resources.

Garden Leave and Deferred Compensation

Garden leave provisions, where the employer continues to pay the employee during the restricted period, improve the enforceability of post-employment restrictions in many jurisdictions. Some companies structure deferred compensation or equity vesting schedules to incentivize employees to remain with the company, achieving similar retention effects without the legal risks of noncompete agreements.

These financial incentives must be carefully structured to avoid being characterized as unenforceable liquidated damages provisions or penalties for leaving employment.

Practical Recommendations

Technology employers should audit existing noncompete agreements for compliance with current state laws, particularly for remote employees who may have relocated to restrictive jurisdictions. Companies should adopt a layered approach using NDAs, non-solicitation agreements, and invention assignments rather than relying solely on noncompetes. For critical roles where noncompetes are legally permissible, agreements should be narrowly tailored in scope, duration, and geographic reach to maximize enforceability.