US non-compete agreement laws by state

Special Update: FTC Bans Non-Compete Agreements Nationwide

On April 23, 2024, the FTC issued a final rule (see pages 561-568) banning non-competes for employees nationwide. The FTC estimates this decision will affect around one fifth of the U.S. workforce, or 30 million people.

The rule will go into effect 120 days after its publication in the Federal Register. Publication is scheduled to occur on May 7, 2024, making the effective date September 4, 2024. Several lawsuits have already been filed challenging the new rule and its future is uncertain. Our in-house Legal Product team at SixFifty expects non-compete law to be in flux for the foreseeable future.

Regardless, employers should prepare to comply with the rule by the effective date, and you may be left having to comply with the current patchwork of state non-compete laws if the rule is delayed during litigation or ultimately found invalid.

Here’s what you need to know about the non-compete ban:

This rule completely shifts the non-compete landscape in the U.S. and institutes a nearly categorical ban. Going forward, all post-employment non-competes are banned unless they’re executed in conjunction with the sale of a business. The rule also applies retroactively, banning all existing non-competes. Note that only the non-compete provision will be voided, not the entire agreement.

It’s hard to overstate what a radical departure this is from existing law. On their own, states have been regulating non-competes with increasing frequency, but this rule goes much further than most states have dared.

This new rule is strikingly broad in scope. Going forward, it applies to nearly all workers equally; the Pfizer CEO and the Walgreens pharmacy tech are treated identically.

The rule also goes further than banning traditional non-compete agreements: It expands the definition of a “non-compete” to other types of restrictive covenants that are written broadly enough that they function as non-competes. In other words, it bans any term or condition of employment that prohibits, penalizes, or prevents a worker from:

This prohibition could apply to non-solicitation agreements, no-poach agreements, and even some non-disclosure agreements. Our employment law team will be monitoring how the FTC enforces the rule and how courts interpret this ambiguous definition of “non-compete.”

Further, this new rule applies both prospectively and retroactively, meaning that any offensive agreement currently in existence or signed going forward is unenforceable, with one exception: Non-competes already executed with senior executives are not voided and will be permitted to run their course.

Senior executives are those who are in a policy-making position and received compensation of:

Under this rule, employers who already executed non-competes with their employees are required to rescind those agreements within 120 days of the publication of the rule in the Federal Register. Employers must also provide “clear and conspicuous notice” to the employee or ex-employee by the rule’s effective date that their non-compete clause will not be, and cannot legally be, enforced against them.

This notice must be delivered to the affected worker either in person, by mail at their last known personal street address, or by email (including the worker’s current work email address or last known personal email address), or by text.

Finally, this federal rule expressly preempts any state law that doesn’t provide protections at least as significant as those it provides. If a state provides more or stronger protections, those provisions will be honored.

For employers who have ever used non-compete agreements, the first step is to entirely discontinue your use of non-compete agreements going forward (though you don’t need to do this quite yet; you still have 120 days from the date of publication). This will likely require you to review any form agreements you have and check whether they contain non-compete provisions or other restrictive covenant clauses that need to be narrowed or removed. You may also want to take advantage of this time to review and implement any other ways you might be able to protect your trade secrets, like installing data protection software, executing other protective agreements like NDAs, or developing and administering trade secret and data security training. The Sedona Conference’s Commentary on Protecting Trade Secrets Throughout The Employment Life Cycle and

the Beck Reed Riden Primer and Checklist for Protecting Trade Secrets andOther Legitimate Business Interests are two helpful resources to help you think through your options.

Next, you will need to determine whether you need to rescind any existing non-compete agreements you have and to send notice to affected employees or ex-employees of the rescission. If you would like to maintain your non-competes where possible, you will need to determine whether any of your employees who are subject to a non-compete satisfy the “senior executive” definition; those are the only employees whose non-competes aren’t automatically voided. You still are prohibited from executing new non-competes with them, though.

Finally, you should keep your eye on any legal updates about this new rule, as it is certain to be challenged in court. The U.S. Chamber of Commerce has already committed to challenging this rule, and there are unquestionably more to follow suit.

For more information on these updates login to your SixFifty account or request a demo of our Employment Docs tool to create state-specific non-compete agreements any time. 

Overview

By: Adam Wright, General Counsel and VP of Legal Product, SixFifty

Both the federal and state governments continued the assault on non-compete agreements. Minnesota became the fourth state to completely ban non-compete agreements with employees. On July 1, 2023, Minnesota will join California, North Dakota, and Oklahoma in the small (but growing) group of states that impose a full ban. Minnesota’s law is the first total non-compete ban since Oklahoma banned them in 1890, more than 130 years ago! Hot on the heels of Minnesota, the New York State Assembly passed a non-compete ban on June 20, 2023. That bill is headed to Governor Hochul’s desk, which she is expected to sign. We’ll briefly dive into the details of these new laws.

Minnesota

Minnesota’s law applies to both employees and independent contractors and provides that “[a]ny covenant not to compete contained in a contract or agreement is void and unenforceable.” The law also makes sure that employers can’t get around the ban by providing that another state’s law will govern the non-compete. If the employee “primarily works and resides in Minnesota,” then Minnesota law must govern and any dispute must be heard in Minnesota courts. Notably, the ban doesn’t apply to nondisclosure agreements, non-solicitation agreements, “agreement[s]​ designed to protect trade secrets or confidential information,” or “agreement[s] restricting the ability to use​ client or contact lists, or solicit customers of the employer.​“ The law does allow for the use of non-competes used in connection with a sale of business. Employers will be relieved to know the law is not retroactive, so non-competes entered prior to July 1, 2023 are not affected.

New York

New York’s law, if signed by the governor, would take effect 30 days after her signature. Like the Minnesota ban, the law is not retroactive, so it doesn’t affect non-competes signed before the effective date. The law also doesn’t apply to an agreement that “prohibits disclosure of trade secrets, disclosure of confidential and proprietary client information, or solicitation of clients of the employer that the [employee] learned about during employment” (i.e., nondisclosure and customer non-solicitation agreements). Unlike the Minnesota ban, the New York law has no exception for non-competes entered in connection with the sale of a business. The law leaves a lot of questions unanswered. For example, it’s unclear whether the law bans employee non-solicitation provisions which prevent departing employees from encouraging others to leave with them. If the law is enacted, we are likely in for years of litigation to determine the contours of the law.

Federal

At the federal level, we continue to monitor the FTC’s proposed non-compete ban, which would ban employee non-competes nationwide. Bloomberg News recently reported that the FTC will not vote on the final version of the rule until April 2024, after the agency received almost 27,000 comments on the draft rule. While the rulemaking process continues, the FTC continues to bring enforcement actions against companies’ unfair use of non-competes. Businesses should be aware that overzealous use of non-competes comes with a real risk, even absent a federal rule banning them.

NLRB

The National Labor Relations Board (NLRB), a different federal agency, was not content to wait for the FTC’s final rule. On May 30, 2023, NLRB General Counsel Jennifer Abruzzo issued a memo saying that employers’ use of non-competes violates the National Labor Relations Act (NLRA). She argued that non-compete provisions violate the NLRA because they “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.” Although this opinion isn’t a rule, it is effective immediately, and indicates the NLRB will increase its scrutiny of non-compete agreements, especially those with low- or middle-wage workers. Importantly, Ms. Abruzzo’s opinion will not affect non-competes with supervisory or managerial employees because they aren’t protected under the NLRA.

Apart from these monumental changes in non-compete law, we’re still monitoring 88 non-compete bills that are pending in 33 states. Stay tuned, as there will certainly be more updates coming in this area of the law.