As readers of this blog will recall, last April, the Federal Trade Commission (FTC) voted along party lines to finalize a rule (the Noncompete Ban) that would have banned the vast majority of employee noncompete agreements across the country. Shortly after the FTC鈥檚 vote, the Noncompete Ban was challenged in three separate lawsuits: first in Texas, then in Pennsylvania, and then in a third case in Florida. The court in Pennsylvania ruled for the FTC, finding the Noncompete Ban lawful and supported by the FTC鈥檚 administrative record. By contrast, the courts in Texas and Florida ruled against the FTC, both finding the Noncompete Ban to be unlawful (albeit on somewhat different grounds). And, importantly, the Texas court issued a broad, universal order, preventing the Noncompete Ban from taking effect nationwide.

In the closing months of the Biden Administration, the FTC appealed the Texas and Florida decisions to the Fifth and Eleventh Circuit Courts of Appeals, respectively. Since Inauguration Day, however, the Trump administration has brought rapid changes to the makeup and direction of the FTC. Within hours of taking office, President Trump appointed a Republican, Andrew Ferguson, to serve as FTC Chair. Two weeks later, the Democratic former FTC Chair, Lina Khan, resigned her seat at the FTC, leaving the FTC with two Republican Commissioners and two Democratic Commissioners. Then, on March 18, President Trump fired the two remaining Democrats 鈥� a controversial move that is being challenged in court. Most recently, on April 10, President Trump鈥檚 nominee to serve as the third Republican Commissioner, Mark Meador, was confirmed by the Senate, giving the Republicans control of the FTC.

All the while, the fate of the Noncompete Ban still remains with the Fifth and Eleventh Circuits. Given the rapid changes to the FTC, on March 7, the FTC asked the two courts to hold the appeals 鈥渋n abeyance鈥� for 120 days, to allow the FTC to reassess whether to continue defending the Noncompete Ban. Both courts granted these requests, ordering the FTC to submit a 鈥渟tatus report鈥� by July 10 (in the Fifth Circuit) and July 18 (in the Eleventh Circuit) to advise on how the FTC intends to move forward.

Given that both and his Republican colleague, , opposed the vote last year on the Noncompete Ban on grounds that they found it unlawful, it seems like only a matter of time before the FTC鈥檚 defense of the Noncompete Ban is officially abandoned. Given the uncertainty over President Trump鈥檚 termination of the two Democratic Commissioners, there was speculation that Chair Ferguson was waiting for the Senate to confirm Mark Meador as the third Republican Commissioner before moving forward with an official vote to abandon the appeal. Now that Commissioner Meador has been confirmed, such a vote could happen in the near future, in which case the Noncompete Ban will officially be dead.

Even if the FTC pulls the plug on the Noncompete Ban, Chair Ferguson has made clear that the FTC intends to continue its efforts to promote competition in labor markets. In February, in announcing the appointment of Daniel Guarnera as Director of the FTC鈥檚 Bureau of Competition, Guarnera鈥檚 鈥渆xperience using the antitrust laws to promote competition in labor and healthcare markets鈥攖wo of my top priorities.鈥� Chair Ferguson added that Guarnera would help 鈥渇ulfill President Trump鈥檚 promise 鈥� to protect the interests of American workers.鈥� Later that same month, Chair Ferguson directed the formation of a to 鈥減rioritize rooting out and prosecuting unfair labor-market practices that harm American workers.鈥� In addition to noncompete agreements, the Labor Markets Task Force is charged with investigating and challenging conduct like 鈥渘o poach鈥� agreements, 鈥渨age-fixing鈥� agreements, unfair or deceptive trade practices that harm gig economy workers, and false or deceptive job advertisements. Interestingly, Chair Ferguson also directed the Labor Markets Task Force to investigate and challenge labor practices that implicate more traditionally conservative issues such as 鈥渉armful occupational licensing requirements鈥� and 鈥渃ollusion or unlawful coordination on DEI metrics.鈥� Therefore, even if the Noncompete Ban seems unlikely to survive in its current form, you can expect the FTC to continue policing labor practices on a case-by-case basis as vigorously as ever.

As we continue to report, noncompete agreements have been subject to unprecedented scrutiny over the past few years. Last April, the Federal Trade Commission (FTC) finalized a rule (鈥淔inal Rule鈥�) ostensibly banning noncompetes, which has been mired in significant legal challenges. Additionally, four states have banned noncompetes (California, Minnesota, North Dakota, and Oklahoma), and the list continues to grow, with Ohio recently joining the list of states with proposed bans. In light of these developments, we have provided guidance to employers seeking to incorporate noncompete provisions in their employment agreements. However, employers in states with existing or proposed noncompete bans can still protect their legitimate business interests through other tools, even without ordinary noncompetition agreements.

Noncompetes Incident to the Sale of a Business:For starters, even if ordinary employment-based noncompetes are banned, there may be exceptions to the general prohibition. For example, the FTC鈥檚 ban on noncompetes contains an express carveout for the 鈥渂ona fide sale of a business entity, of the person鈥檚 ownership interest in a business entity, or of all or substantially all of the business entity鈥檚 operating assets.鈥� Even California 鈥� widely regarded as one of the most hostile jurisdictions toward noncompetes 鈥� will enforce noncompetes when they are part of the sale of a business or its associated goodwill and the dissolution of a partnership or limited liability company. Employers must exercise caution in determining whether a specific transaction, along with the individual’s involvement, meets the criteria for the relevant state鈥檚 sale of business exception.

Non-Solicits: If employers are prohibited from implementing noncompetes in their employment agreements, the FTC鈥檚 Final Rule and many states with noncompete bans nevertheless permit certain non-solicitation agreements. Of course, employers will want to carefully review the laws of each state in which they operate to ensure that their non-solicitation agreements are reasonable and enforceable. Some non-solicitation or 鈥渘o-poaching鈥� agreements, particularly those that apply to customers, might be deemed similar to a noncompete and rendered unenforceable. By contrast, non-solicits applicable to employees generally survive stricter scrutiny. Regardless, employers must narrowly tailor their non-solicitation agreements to protect the employer鈥檚 legitimate business interests and must ensure they are reasonable terms of duration and scope. Employers should also be careful about adding new non-solicitation obligations to existing employees, as some states require existing employees to receive new consideration, including material elevations in position or stock awards, for the new obligations to stick.

Non-Disclosure (NDAs) and Confidentiality Agreements: Despite the turbulence surrounding noncompetes, employers may still protect their legitimate business interests through NDAs and confidentiality agreements. NDAs generally limit employees from using, sharing, or disclosing confidential information and trade secrets obtained from their employers during and after employment. While similar to NDAs, confidentiality agreements tend to be broader and focus specifically on protecting sensitive information. Employers should understand, however, that NDAs included in certain settlement agreements may be subject to heightened scrutiny and regulation.

Non-Disparagement Agreements: Employers should also consider implementing reasonable non-disparagement provisions in their employment agreements. Such provisions generally prohibit or limit employees from making negative statements about their employers during and after employment. While such provisions can help protect an employer鈥檚 image and mitigate fallout from turbulent terminations, employers should be careful not to draft their non-disparagement agreements to be overly one-sided or impose unfair burdens on a single party. Employers should also be cognizant that non-disparagement agreements included within severance agreements tend to be subject to stricter scrutiny and regulation.

Liquidated Damages: Finally, employers may reduce the administrative burden of protecting their legitimate business interests by including reasonably tailored liquidated 鈥� or stipulated 鈥� damages provisions. These provisions specify a predetermined amount as damages for an employee鈥檚 breach of their restrictive covenants. Generally, a liquidated damages provision will be upheld where it would be impracticable or extremely difficult to calculate the actual damages for the breach of a provision when the contract was made and the amount set as liquidated damages represents a reasonable estimate of fair compensation for the loss sustained. Accordingly, a liquidated damages provision could greatly expedite any litigation resulting from a breach of a restrictive covenant by shortcutting the otherwise time-consuming and expensive process of identifying an employer鈥檚 actual damages resulting from a breach. To ensure these provisions are reasonable, however, employers should carefully draft liquidated damages provisions for each restrictive covenant at issue, as some courts may find that universally applicable liquidated damages do not accurately estimate the damages sustained if they proscribe the same remedy for breaches of materially different covenants.

While the legality and enforceability of noncompetes may be in flux, employers still have several tools to protect their legitimate business interests upon an employee鈥檚 departure. Whether you need assistance with drafting, reviewing, or revising your employment agreements, 麻豆直播 & Lardner LLP is well-positioned to assist in ensuring that your agreements are comprehensive and provide the maximum protection permitted under the law.

In line with the national trend making noncompetes more difficult to enforce, a number of Delaware courts have recently refused to 鈥渂lue pencil鈥� overbroad noncompetition agreements and have stricken them in their entirety. As a practical matter, this means that, in order for a noncompete to be enforceable under Delaware law (the chosen law for many business disputes for companies outside of Delaware), they must be narrowly drafted to be reasonable in scope and designed to protect only the employer鈥檚 legitimate business interests. Employees with noncompetes under Delaware law can no longer rely on Delaware courts to 鈥渂lue pencil鈥� a noncompete to make it enforceable. Thus, as discussed herein, noncompete agreements should be drafted to comply with the specific guidance that Delaware courts have provided, most recently in the Delaware Supreme Court鈥檚 decision in Sunder Energy, LLC v. Jackson, C. A. 455 (Del. Dec. 10, 2024).

In Sunder Energy, the plaintiff sought to enforce a noncompete against one of its former founders who went to work for a competitor. The noncompete was deemed overly broad in that it prohibited the former founder and his 鈥渁ffiliates鈥� from engaging in door-to-door sales activities in the market where the former employer operated or anticipated operating. The Delaware Court of Chancery held that the noncompete was overbroad because it 鈥渞equires that [defendant] prevent his [a]ffiliates from engaging in any sales of products to consumers in their homes. As written, [defendant鈥檚] daughter 鈥榗annot go door to door selling Girl Scout cookies.鈥欌�� The court also found the noncompete鈥檚 duration was unreasonable because it expired two years after the former founder ceased to own certain incentive units, which he could only transfer when his former employer decided to trigger the restriction, thus making the noncompete potentially indefinite as to time.

Significantly, the Court of Chancery declined to 鈥渂lue pencil鈥� the noncompete to make it enforceable, and the Delaware Supreme Court affirmed the lower court鈥檚 ruling. The court found that to blue pencil the restriction would result in employers being 鈥渓ess incentivized to craft reasonable restrictions from the outset.鈥� The court noted that, unlike the facts in Sunder Energy, Delaware courts have exercised their discretion to blue pencil noncompetes under circumstances when: (i)听the language of the non-compete was specifically negotiated; (ii) valuable consideration was exchanged for the restriction, or (iii) in the context of the sale of a business. The court declined to 鈥渃raft an entirely new covenant to which neither side agreed.鈥�

The drafting lessons learned from Sunder Energy are that noncompetes under Delaware law must be drafted narrowly as to scope of activities, geographic area, and time of limitation in order to be enforceable, and because Delaware courts may not 鈥渂lue pencil鈥� a noncompete, it would be prudent to draft with alternatives so that courts can strike without having to rewrite or blue pencil the agreement to make it enforceable. Lastly, the Sunder Energy decision reminds employers that valuable consideration and sufficient time to consider and understand the restriction (with the advice of counsel) makes it more likely that the noncompete will be enforceable or that a Delaware court might exercise its discretion to blue pencil the restrictive covenant.

2024 was a year in which there were significant developments with respect to restrictive covenants, particularly for employment noncompete agreements. As our readers are aware, the Federal Trade Commission (FTC) published a new rule that would have all but eliminated such agreements on a national basis 鈥� however, the rule was then found to be beyond the FTC鈥檚 jurisdiction, and the law returned to a state-by-state application.

More recently, the Wisconsin Court of Appeals held in December 2024 鈥攆or the first time 鈥� that Wisconsin law allows for disgorgement as a remedy in tortious interference claims involving interference with an employee noncompete agreement. For those who are unfamiliar with the term, tortious interference is a common law claim where a plaintiff, in this case the former employer, can sue a defendant, in this case the new employer, for damages for wrongfully interfering with the contract (covenant) between the former employer and its former employee.

In the case, Frey Construction & Home Improvement, LLC v. Hasheider Roofing & Siding, Ltd.,[1] an employee bound by a noncompetition agreement voluntarily resigned his employment for a job with a competitor. The new employer allegedly knew of the noncompete agreement when it hired the employee.The employee鈥檚 former employer filed suit against the employee for breach of the noncompetition agreement and against the new employer for tortious interference with the contract.

The case presented an issue of first impression for the Wisconsin Court of Appeals: 鈥淸W]hether disgorgement is a proper remedy for tortious interference with contract claims.鈥�[2]

Disgorgement is a type of legal remedy whereby a party is ordered to give up profits that were unlawfully obtained. The court in Frey explained: 鈥淚f ordered as a remedy, 鈥榙isgorgement requires that the defendant give up those gains properly attributable to the defendant鈥檚 interference with the claimant鈥檚 legally protected rights.鈥欌��[3] Consequently, if disgorgement is used as a remedy against an employer found liable for tortious interference with a noncompete agreement, the plaintiff is entitled to any profits the employer obtained because of the protected employee鈥檚 hire.

The Frey court ultimately held that disgorgement could indeed be a proper remedy in some Wisconsin tortious interference cases involving employee noncompete agreements. As a case set for publication, it will have precedential weight in Wisconsin.

Although Frey鈥檚 holdingis not necessarily a surprise, there are two important takeaways for employers in Wisconsin:

• For employers considering whether to pursue a claim against a former employee and their new employer based on an alleged noncompete violation, Frey means that you may be able to recover damages even if you have not lost any revenue because of the breach. Rather, damages may now be measured by the amount of profit/revenue the hiring employer has realized.

• For companies that hire employees with noncompete agreements, Frey warns of the importance of pre-hiring due diligence. Before onboarding a new employee, it is critical to confirm the existence and enforceability of any restrictive covenants and to review whether they might be violated by the hiring. If a former employer files suit for an alleged breach, they may pursue claims against you, the new employer (for interfering with the restrictive covenant simply by employing the employee in a position that violates the agreement), and under Frey, they may seek all profits generated by hiring the new employee.

We will continue to monitor and report on developments in this highly dynamic area of law.

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[1] No. 2023AP67, 2024 WL 5135180, at *2 (Wis. Ct. App. Dec. 17, 2024).

[2] Id. at *1

[3] Id. at *9 (quoting Kokesh v. SEC, 581 U.S. 455, 458鈥�59 (2017))

As courts continue to be critical of noncompete agreements, employers must remain informed and proactive to make sure their agreements can withstand judicial scrutiny. Around this time last year, we reported on annual increases to noncompete salary thresholds in various states, which are again on the horizon for 2025.听

Employers should therefore be sure to review their agreements for compliance with salary thresholds. And, while noncompete agreements are top of mind, employers should consider another critical noncompete issue: noncompetes in independent contractor agreements.  

Before asking an independent contractor to sign a noncompete agreement, employers should do the following: (1) review state-specific noncompete law, including law that relates specifically to independent contractors; (2) understand the 鈥渞ule of reason鈥� and make sure all agreements are narrowly tailored, which takes on enhanced importance for parttime service providers who are presumably providing services to other companies; and (3) take steps to make sure the noncompete agreement will not jeopardize the independent contractor classification.

1. State Law

As we have continued to report, noncompete law is rapidly evolving and differs significantly from state-to-state. Not only does state noncompete law differ generally, but it also differs with respect to independent contractors specifically. The below sample of state law descriptions demonstrates some of the different ways states can approach this topic.

Washington. Washington law technically permits noncompete agreements for independent contractors, but the Washington legislature has enacted stringent salary thresholds that are adjusted annually for inflation. As of 2025, the state imposes a salary threshold of $123,394.16 for employees, which is measured by the total earnings reported on an employee鈥檚 W-2. In comparison, the salary threshold for independent contractors is more than twice as much, at $308,485.43, measured by the payments reported on a 1099-Misc. Wash. Rev. Code Ann. 搂 49.62.050.   

Oregon. Oregon, like its northern neighbor Washington, imposes a salary threshold and various notice requirements. The statute uses the word 鈥渆mployee鈥� throughout, and explicitly excludes 鈥渋ndependent contractors鈥� from the definition of 鈥渆mployees,鈥� implying that the restrictions set forth in the statute do not apply to independent contractors.[1] However, at least one Oregon court has suggested otherwise, applying the statutory requirements to independent contractors without referencing the statutory text that excludes independent contractors form the definition.[2]

Texas. In Texas, courts treat noncompete agreements with independent contractors the same as noncompete agreements with employees.  

2. The Rule of Reason

No matter the jurisdiction, the 鈥渞ule of reason鈥� always applies to noncompete agreements. This point is critical for noncompetes entered by independent contractors.

Noncompete agreements must not be broader than necessary to protect a business鈥檚 legitimate interests. In practice, this means a noncompete agreement might need to be considerably narrower for an independent contractor than for an employee performing similar duties. If an independent contractor is only working part-time for a company with the shared understanding that the contractor will rely on work from other companies to develop a full workload, then courts are unlikely to enforce a noncompete agreement that unduly inhibits the contractor from securing a full workload. To keep agreements sufficiently narrow, companies may choose to narrowly define what constitutes a competitive business, such that the definition only encompasses aspects of the business for which the contractor performed services. It might choose to forego a geographic restriction and instead apply a customer-based restriction, one that only extends to customers the contractor interacted with on behalf of the company. It might choose to limit the temporal scope to the agreement to the term of the consulting relationship. Whatever the limitations look like, companies should think critically about how they can make their independent contractor noncompete agreements narrower than the noncompete agreements employees are asked to sign.

3. Independent Contractor Classification

In some cases, a noncompete agreement can jeopardize the independent contractor classification. If a court or agency is skeptical as to whether an individual qualifies as an independent contractor (rather than an employee), some jurisdictions view the noncompete agreement itself as evidence of employee status. For example:

Indiana. In Jackson v. Leader鈥檚 Institute, LLC,[3] the court applied the economic realities test to determine whether an individual was an independent contractor or an employee. When the court considered the permanency and duration of the working relationship 鈥� one of factors in the economic realities test 鈥� the court factored into its analysis the existence of a noncompete agreement.

Mississippi. In Handyman House Techs, LLC v. Mississippi Department of Employment Security,[4] the court held that a maintenance and repair worker was an employee, not an independent contractor. One factor the court considered that weighed in favor of the employee classification was the existence of a noncompete agreement.

Idaho. Idaho courts have looked to the existence of (and substance of) noncompete agreements to determine whether an individual is properly characterized as an independent contractor. See State ex rel. Indus. Comm鈥檔 v. Sky Down Skydiving, LLC[5]. (鈥淎lthough noncompetition clauses are permitted for independent contractors under Idaho Code section 44-2701, such a provision is more indicative of the type of control an employer typically exercises over an employee.鈥�)

One simple step that companies can take is to avoid referring to an independent contractor as an 鈥渆mployee鈥� in a noncompete agreement. However, mere verbiage is not sufficient to avoid classification issues. Consideration should be given to how a broad noncompete for an independent contractor might be viewed by a court as foreclosing working for other companies (and thus indicating control of the company over the worker). 

Employers should also be mindful of the Defend Trade Secret Act of 2016 (DTSA). The DTSA鈥檚 immunity notice provisions apply to employees and 鈥渁ny individual performing work as a contractor or consultant for an employer.鈥� Therefore, the DTSA immunity notice should be included in independent contractor noncompete agreements entered between a company and an individual performing work as a contractor or consultant.

Employers expecting to enter noncompete agreements with independent contractors should work with counsel to make sure their agreements comply with applicable state law, are reasonably tailored for the independent contractor involved, and are not going to jeopardize the independent contractor classification. We will continue to monitor and report on developments in this area of the law.

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[1] See Or. Rev. Stat. Ann. 搂 653.295(8)(c); Or. Rev. Stat. Ann. 搂 653.310(2)(a).

[2] See Naegeli Reporting Corp. v. Petersen, No. 3:11-1138, 2011 WL 11785484 (D. Or. Dec. 5, 2011).

[3] No. 114-CV-00193-TWP-DML, 2015 WL 7573228, at *7 (S.D. Ind. Nov. 24, 2015).

[4] 337 So.3d 681, 689 (Miss. Ct. App. 2022).

[5] 462 P.3d 92, 101 (Idaho 2020)

Recent legal developments may doom the Federal Trade Commission (FTC) Noncompete Rule (the 鈥淩ule鈥� or the 鈥淣oncompete Rule鈥�). The recent Supreme Court decision in has significant implications for the enforcement of administrative rules, including the FTC’s Rule. Likewise, on July 3, 2024, a federal court in Texas issued an injunction against the FTC鈥檚 Noncompete Rule, which highlights the significant judicial resistance to the regulation and reflects broader challenges the FTC faces in implementing the proposed Rule.

The FTC’s Noncompete Rule

• Proposed Rule: The FTC’s proposed rule aimed to ban most noncompete clauses, arguing that such agreements restrict worker mobility and suppress wages. The Noncompete Rule is scheduled to take effect on September 4, 2024.
• Legal Challenges: The Rule has faced legal challenges from businesses and industry groups, arguing that the FTC overstepped its authority. Two recent decisions 鈥� Chevron U.S.A., Inc. v. Natural Resources Defense Council and Ryan LLC v. Federal Trade Commission 鈥� have crippled the Noncompete Rule and jeopardized enactment in September 2024.

A series of recently decided court cases will impact whether the FTC鈥檚 proposed Rule survives.

The Law Since 1984 鈥� The Chevron Deference Doctrine

• Agency Deference: In 1984, the U.S. Supreme Court ruled in that courts should defer to agency interpretations of ambiguous statutes that the agency administers, as long as the interpretation is reasonable.
• Impact: This doctrine has given agencies like the FTC substantial authority to interpret and enforce regulations, even when the statutory language is ambiguous. The FTC relied on this doctrine in enacting the Noncompete Rule.

The Supreme Court Changes the Law

• Supreme Court Decision: on June 28, 2024, the Supreme Court issued its decision in Loper, effectively overruling the Chevron deference.
• Implications: Without the Chevron deference, agencies now face a higher burden of proof in demonstrating that their regulatory actions are justified under the statutes they administer. Courts will no longer automatically defer to the agency’s interpretation, instead engaging in a more rigorous review of the statutory language and the agency’s rationale.

The Ryan Foods Case Is the First to Enjoin the Enactment of the FTC Noncompete Rule

Ryan Foods, a major food distribution company, filed a lawsuit challenging the FTC鈥檚 authority to enforce a nationwide ban on noncompete agreements. As we previously reported, a federal district judge issued an injunction on July 3, 2024, barring enforcement only against the parties and members of the parties to the litigation. The court focused on two issues: (1) the likelihood that the FTC had overreached and exceeded its authority to develop substantive rules based on the recent Loper decision; and (2) a total ban on all noncompetes would likely be arbitrary and capricious. In addition, the court noted its hesitation to issue a nationwide injunction, thereby leaving other pending cases as possible avenues to stop the September implementation date.

What Are the Impacts of Loper and Ryan Foods on the FTC Noncompete Rule?

The impacts of the recent decisions cannot be overstated because of the proximity of the September 4, 2024, effective date of the proposed FTC ban. Below are some important ramifications of the recent rulings:

1. Increased Judicial Scrutiny: The ruling against the FTC in the Ryan Foods case exemplifies the increased judicial scrutiny the agency will face post-Loper.
2. Regulatory Uncertainty: With courts issuing injunctions against the ban, there is significant uncertainty about the future of the FTC鈥檚 Noncompete Rule. This could discourage the agency from pursuing aggressive enforcement of the Rule.
3. Impact on Businesses: Businesses like Ryan Foods are likely to continue challenging the Rule, arguing it harms their competitive edge and ability to safeguard proprietary information.
4. Legislative Actions: Given the judicial pushback, there may be calls for Congress to clarify the statutory authority of the FTC regarding noncompete agreements, potentially leading to new legislation.
5. Legal Precedent: The injunction in the Ryan Foods case could set a legal precedent for other businesses to challenge the FTC鈥檚 Noncompete Rule, leading to a patchwork of legal battles across the country.
6. Administrative Authority: The decision reflects a broader trend of judicial skepticism toward expansive interpretations of administrative authority, particularly in light of the Supreme Court鈥檚 recent rulings.

Conclusion

The Ryan Foods injunction against the FTC鈥檚 Noncompete Rule underscores the significant legal challenges the FTC faces in enforcing this Rule. The combination of the Supreme Court鈥檚 reversal of the Chevron deference as well as the specific legal arguments in cases like Ryan Foods make it increasingly difficult for the FTC to implement its Rule without clear and explicit statutory backing. The Ryan Foods case exemplifies the broader judicial resistance to regulatory overreach and highlights the ongoing legal and legislative battles that will shape the future of noncompete agreements in the United States.

As we continue to report, noncompete agreements are an area of ever-increasing scrutiny and limitation. Last year we wrote about states with civil and criminal penalties for violations of noncompete law, which is just one aspect of the continuing trend toward restricting employee noncompete agreements.听

Some states have gone a step further and banned such agreements (with some limited exceptions). As of now, four states have bans: California, Minnesota, North Dakota, and Oklahoma.* We expect this list to grow in 2024. The only question is which state will be next. Currently, six states (and New York City) have pending legislation that, if enacted as written, would ban employee noncompete agreements 鈥� Illinois, Maine, Massachusetts, Michigan, New York City, Rhode Island, and Wisconsin. Of these, Maine is posed to be the next state to enact a ban. 

• Illinois:听 would amend the Illinois Freedom to Work Act and make 鈥渃ovenant[s] not to compete,鈥� as the term is defined in the Act, unenforceable. The ban would not apply to several types of agreements, including: (i) nonsolicitation agreements, (ii) sale-of-business noncompete agreements, and (iii) agreements prohibiting the use or disclosure of trade secrets or inventions, among many others. Not only would the bill ban noncompete agreements with Illinois employees, it would further state that a noncompete agreement: 鈥渋s illegal and void regardless of where and when the [agreement] was entered into鈥� and that 鈥淸a]n employer or former employer shall not attempt to enforce a contract that is void and unenforceable under this Act regardless of whether the contract was signed and the employment was maintained outside of [Illinois].鈥� In addition, the bill contains a notice provision that would require employers to notify employees, as well as former employees who were employed after January 1, 2023, in writing on or by April 1, 2025, that noncompete agreements are void and unenforceable. H.B. 5385 was introduced and referred to the Rules Committee on February 9, 2024.
• Maine: would ban all employee noncompetes with three limited exceptions: (i) when a business is sold, (ii) when an LLC shareholder sells or disposes of all of his shares, and (iii) when a partnership is dissolved. The bill 鈥� which would not be retroactive 鈥� would also invalidate out-of-state choice-of-law provisions. In addition to banning noncompete agreements, the bill would require employers to display workplace posters notifying employees of the ban. Violating the law could subject employers to a $5,000 civil penalty. The bill has passed in the House and the Senate; it was sent to Governor Janet Mills鈥� desk on March 19, 2024. She is expected to sign the bill into law.听
• Massachusetts:听Despite already strictly curtailing the use of noncompete agreements, Massachusetts looks to further restrict these covenants. would make 鈥渘oncompetition agreements,鈥� as the term is defined in , void and unenforceable. The ban would not apply to several types of agreements listed in Section 24L of Chapter 149 of the General Laws, including: (i) employee or customer nonsolicitation agreements, (ii) sale-of-the-business noncompete agreements, and (iii) nondisclosure or confidentiality agreements, among many others. Most recently, on March 4, 2024, the bill was referred to the Committee on Senate Rules.听
• Michigan: would ban any agreement that 鈥減rohibits the employee from engaging in employment or a line of business after termination of employment.鈥� There has been no activity on this bill since May 2023, when it was referred to the Committee on Labor.
• New York City:听 would ban employers from entering into noncompete agreements with workers (which includes both employees and independent contractors) in New York City. The bill is written broadly and does not specify what connection a worker must have to New York City to fall within the purview of the law. For example, it is unclear whether an employee must be 鈥渂ased in鈥� New York City, or whether it is sufficient to 鈥渨ork in鈥� New York City. The law would be retroactive, cancelling noncompete agreements entered into before the law takes effect. The law would impose a civil penalty of $500 per violation. The most recent activity on this proposed bill occurred on February 28, 2024, when it was referred to the Committee on Consumer and Worker Protection.
• Rhode Island: would make noncompete agreements unenforceable against employees, except in the sale-of-business context. The Rhode Island House introduced the bill and referred it to the House Labor Committee on March 13, 2024. HB 8059 is identical to , which was passed by the Rhode Island Senate during the 2023 legislative session but died before it was referred to the Rhode Island House.听
• Wisconsin: would make employee noncompete agreements void. The prohibition would not apply to nondisclosure agreements. It also would not apply to noncompete agreements that are limited to 鈥減rohibiting or restricting the unauthorized use of a customer list or intellectual property owned or licensed by the employer,鈥� but it seems that the bill would otherwise restrict nonsolicitation covenants that do not rely on the misuse of proprietary information. The bill would require employers to display workplace posters notifying employees that noncompete agreements are illegal. The last activity on this proposed bill occurred on October 12, 2023, when it was read for the first time and referred to the Committee on Labor and Integrated Employment.

Employers expecting to enter noncompete agreements with employees in the above-listed states should work with counsel to consider the implications of the pending legislation, if any. This is a rapidly evolving area of noncompete law as more state legislatures (and the federal government) consider bans and other limits on employee-based noncompete agreements, including fines for companies that violate the law. It is anticipated that other state legislatures may propose similar bans in the near future. We will continue to monitor and report on developments in this area of the law.

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*Although Mont. Code Ann. 搂 28-2-703 (enacted in 1895), reads like a ban on noncompete agreements, Montana courts enforce such agreements so long as they are carefully drafted to conform to the various state-specific requirements set forth in Montana鈥檚 common law.  

As our readers are aware, we have been tracking the ongoing trend of restricting employee non-compete agreements by various states and the federal government, including the FTC and NLRB. In fact, some states 鈥� most notably California 鈥� have issued broad prohibitions on non-compete agreements.

These contracts, which are common across a variety of industries, have been subject to ever-increasing scrutiny and limitation, even in states long seen as havens for commercial agreements, to ensure they are narrowly tailored and reasonably necessary to protect employers鈥� legitimate business interests.

For employers seeking to include non-compete provisions in their employment agreements, understanding the evolving legal landscape and the need for precision is more paramount than ever.

Traditionally, non-compete agreements have aimed to safeguard proprietary information, trade secrets, and client relationships. While these important interests remain, their use has expanded across industries and roles, raising concerns about potential abuse and limitations on employee mobility. Enforceability of non-compete provisions can vary significantly from state-to-state. However, in those states where non-compete agreements are not prohibited, there are some common themes that are generally considered in determining whether a restriction is enforceable. Accordingly, to ensure that non-compete agreements meet legal standards and serve their intended purpose without unduly restraining employees, we recommend that employers consider the following key factors:

1. Legitimate Business Interests: Employers should craft non-compete agreements to protect genuine business interests. These may include safeguarding trade secrets, proprietary information, client relationships, or investments in specialized employee training. Employers should delineate these interests to justify the agreement鈥檚 necessity. Now more than ever, employers should consider whether their legitimate business interests are adequately protected by less onerous covenants, like non-solicitation agreements (for both employees and customers/clients) and non-disclosure and confidentiality provisions. Should employers implement various restrictive covenants in their contracts, they should identify specific or unique interests that their non-compete agreements are essential to protect.
2. Narrow Tailoring: Employers should narrowly tailor the scope of non-compete agreements to protect specific business interests without unduly restricting an employee鈥檚 ability to seek alternative employment. Blanket restrictions covering wide-ranging industries may face heightened scrutiny and be deemed unenforceable.
3. Geographic and Temporal Limits: Non-compete agreements should specify reasonable geographic restrictions and timeframes. These limitations should directly tie to the employer鈥檚 legitimate business interests as well as reflect the industry鈥檚 competitive landscape and the locations where the employer actually does or is actively planning to do business. Overly expansive restrictions may be deemed unreasonable and unenforceable.
4. Consideration and Fairness: Non-compete agreements must be entered into willingly by both parties and be supported by adequate consideration. Employees should receive something of value in exchange for agreeing to the restrictions, such as employment opportunities, specialized training, or access to proprietary information. Employers should keep in mind that non-compete agreements signed by existing employees are not always enforceable, and some states will require the existing employee to receive meaningful new consideration, including material elevations in position or stock awards.
5. Review and Revision: Employers should periodically review and update non-compete agreements to ensure they remain relevant and compliant with evolving legal standards. Changes in business practices, industry regulations, or court rulings may necessitate adjustments to the terms of these agreements.
6. Legal Consultation: Given the complexity and variability of non-compete laws across jurisdictions, seeking legal counsel is advisable when drafting or enforcing these agreements. Our experienced attorneys can provide valuable guidance on compliance with state and federal regulations and help mitigate the risk of litigation.听

In light of increased scrutiny from lawmakers and regulators as well as the complex patchwork of state authority governing this area of law, employers must approach the use of non-compete agreements judiciously. By carefully considering the necessity, scope, and fairness of these contracts, employers can protect their legitimate business interests while respecting the rights and mobility of their employees and fostering a balanced and equitable employment landscape.

While many state legislatures have jumped on the Federal Trade Commission鈥檚 (FTC) bandwagon by enacting prohibitions on restrictive covenants (which includes both non-competition and non-solicitation provisions), Washington, D.C.鈥檚 Office of the Attorney General (OAG) has gone one step further, imposing a range of fines and penalties for violations of Washington, D.C.鈥檚 non-compete ban.听

As an overview, the non-compete ban, effective as of October 1, 2022, imposes the following limitations on employers: (1) non-competes can only be implemented with highly compensated employees (generally those earning $150,000 or more; (2) the non-compete provision must be no longer than one year following separation from employment; and (3) employers are also prohibited from seeking to enforce any form of restrictive covenant (including non-solicitation provisions relating to employees, clients, and vendors) with any worker other than highly compensated employees. 

While the plain language of Washington, D.C.鈥檚 non-compete ban is clear and straightforward, that has not stopped employers from trying to disregard or circumvent the law. Although this strategy may have worked for a short time, in recent weeks the OAG has publicly announced several settlement agreements with a handful of employers who admitted to violating said non-compete ban.

Setting aside fines and penalties, employers who are found in violation of the non-compete ban will likely face a public relations disaster. In one case, the OAG required an employer 鈥� a Florida healthcare staffing firm that did business in Washington, D.C. 鈥� to pay a former employee over $100,000 after refusing to release the employee from a non-compete agreement. Even though the former employee had alerted the company that its non-compete contract was illegal, the employer remained steadfast, causing the former employee to remain unemployed for ninety (90) days. In a different matter, the OAG required a franchisor to stop enforcing a 鈥渘o poach鈥� clause with its franchisees where the provision prevented workers from going to different franchises within the same fast food chain. The public settlement agreement also required the franchisor to refrain from including 鈥渘o poach鈥� provisions in its franchisee contracts on a going-forward basis.

Based on current trends, it is very likely that other state enforcement agencies will take a page out of the OAG鈥檚 playbook. Because the landscape of restrictive covenants has been ever-changing in the last few years, it is important for employers to remain vigilant in their constant review of state employment laws where they conduct business within the United States. The 鈥渟eek forgiveness, not permission鈥� approach is not a winning strategy.