Understanding Non-Compete Agreement Enforceability

Non-compete agreements restrict former employees from working for competitors or starting competing businesses for a specified period after leaving employment. Their enforceability varies dramatically by state, and the legal landscape continues to shift. Employers must understand the current rules to create agreements that will hold up.

State-by-State Variation

Non-compete enforceability spans a wide spectrum:

• California: Non-compete agreements are generally void and unenforceable as a matter of public policy under Business and Professions Code Section 16600, with exceptions for certain circumstances, such as the sale of a business.
• North Dakota, Oklahoma, Minnesota, and Colorado: Have enacted broad bans or severe restrictions on non-competes.
• Many states: Generally enforce non-competes if they are reasonable in scope, duration, and geographic area; however, there are notable exceptions, and employers should be aware of states with stricter regulations.
• Recent trends: Some states are increasingly banning or restricting non-competes, particularly for low-wage workers, as evidenced by recent legislative changes in various jurisdictions.

Even in states that enforce non-competes, courts scrutinize them carefully and will often narrow or void agreements that are overly broad.

The FTC Noncompete Rule

The Federal Trade Commission's final rule banning most noncompete agreements nationwide, issued in April 2024, was struck down by the U.S. District Court for the Northern District of Texas in August 2024 (Ryan LLC v. FTC) before it could take effect. The court held that the FTC lacked statutory authority to issue the rule. The decision was set aside on a nationwide basis, so the federal rule is not in effect. Non-compete enforceability therefore continues to be governed by state law.

Elements of an Enforceable Agreement

In states that permit non-competes, courts generally evaluate:

• Protectable interest: The employer must have a legitimate business interest to protect, such as trade secrets, confidential information, customer relationships, or specialized training.
• Reasonable duration: Typically one to two years; longer periods face greater scrutiny.
• Reasonable geographic scope: Must be limited to the area where the employer actually does business or where the employee had influence.
• Reasonable activity restriction: Must be narrowly tailored to protect the specific interest at stake.
• Adequate consideration: New employees may receive employment as consideration; existing employees typically need additional consideration such as a raise, bonus, or promotion.

Alternatives to Non-Competes

Given the uncertain enforceability of non-competes, consider these alternatives:

• Non-solicitation agreements: Prohibit the former employee from soliciting your customers or employees, which are generally more enforceable.
• Non-disclosure agreements: Protect confidential information and trade secrets without restricting where someone can work.
• Garden leave clauses: Pay the employee during the restricted period in exchange for non-competition.
• Forfeiture provisions: Condition post-employment benefits (such as deferred compensation) on non-competition.

Best Practices for Employers

If you use non-compete agreements:

• Tailor each agreement to the specific role and the information or relationships the employee will access.
• Keep restrictions as narrow as possible while still protecting your interests.
• Provide adequate consideration, especially for existing employees.
• Have employees sign the agreement before starting work or at the time of a meaningful change in employment terms.
• Review agreements periodically to ensure they reflect current law.
• Consult with employment counsel in each state where you use non-competes.
• Maintain documentation of the protectable interests that justify each agreement.

Enforcement Considerations

Before enforcing a non-compete:

• Assess whether the agreement is likely enforceable under current law.
• Consider the business damage versus the cost and publicity of litigation.
• Send a cease-and-desist letter as a first step.
• Notify the new employer of the agreement's existence.
• Be prepared for the possibility that a court may modify rather than enforce the agreement as written.
• Document the protectable interest that has been or will be harmed.