Non-compete agreements are among the most contentious and heavily litigated contract provisions in business law. Employers rely on them to protect legitimate business interests from former employees who might join competitors or start competing businesses. Employees often view them as unfair restrictions on their ability to earn a living. The enforceability of non-compete agreements varies dramatically from state to state, and understanding your jurisdiction’s approach is crucial whether you’re an employer seeking to enforce a covenant or an employee subject to one.
What Are Non-Compete Agreements?
A non-compete agreement, also called a covenant not to compete or restrictive covenant, is a contract provision that prohibits an employee or business partner from competing with the employer or company for a specified period after the relationship ends. These agreements typically restrict:
- Working for competing businesses
- Starting a competing business
- Soliciting the company’s customers or employees
- Using confidential information or trade secrets
Non-competes are distinct from non-disclosure agreements (which protect confidential information) and non-solicitation agreements (which prevent recruiting customers or employees), though these provisions are often combined in employment contracts.
The Policy Tension
Non-compete agreements create a fundamental tension between competing policy interests:
Business Interests Supporting Enforcement
Employers argue that non-competes are necessary to:
- Protect trade secrets and confidential information
- Prevent unfair competition from employees who gained expertise at the employer’s expense
- Preserve customer relationships and goodwill
- Encourage employers to invest in employee training
- Protect against former employees using inside knowledge to compete unfairly
Employee Rights and Public Policy Concerns
Critics argue that non-competes:
- Restrict workers’ mobility and ability to earn a living
- Suppress wages by reducing competition for talent
- Stifle innovation and entrepreneurship
- Harm economic development
- Are often imposed on low-wage workers who have no trade secrets or special training
This tension has led to widely varying approaches across different states.
General Requirements for Enforceability
While specific requirements vary, most jurisdictions that enforce non-competes require that they be:
Supported by Adequate Consideration
The employee must receive something of value in exchange for agreeing to the non-compete. For new employees, the job itself typically constitutes sufficient consideration. For existing employees, continued employment alone may not be adequate consideration in some states—the employer may need to provide a promotion, raise, bonus, or other additional benefit.
Reasonable in Scope
Courts assess reasonableness along several dimensions:
Geographic Scope: The restricted territory must be reasonably related to the employer’s actual business footprint. A nationwide restriction may be appropriate for a national company but unreasonable for a local business serving a single city.
Duration: Most courts view 1-2 years as presumptively reasonable, though shorter periods may be required for less senior employees or where the employer’s interests are limited. Restrictions longer than 3-5 years are often deemed excessive.
Scope of Prohibited Activities: The restriction must be tailored to the employer’s legitimate interests. Blanket prohibitions on working in an entire industry may be too broad, while restrictions on specific competitive activities may be acceptable.
Necessary to Protect Legitimate Business Interests
Non-competes must protect legitimate employer interests such as:
- Trade secrets and confidential information
- Customer relationships and goodwill
- Specialized training provided to the employee
- Investment in the employee’s development
Courts won’t enforce non-competes merely to prevent ordinary competition or to punish employees for leaving.
Not Contrary to Public Policy
Even if a non-compete meets other requirements, courts may refuse enforcement if doing so would harm public policy. For example, non-competes for physicians are often disfavored because they can restrict access to healthcare.
State-by-State Variations
Non-compete enforceability varies dramatically by state, falling generally into several categories:
States That Generally Prohibit Non-Competes
California: California has the most restrictive approach, rendering non-competes void except in limited circumstances (sale of a business or dissolution of a partnership). California courts will not enforce non-competes even if reasonable.
North Dakota: Generally prohibits non-competes with limited exceptions.
Oklahoma: Prohibits employee non-competes but allows them in certain business sale contexts.
These states’ policies reflect a view that employee mobility and competition are more important than the business interests non-competes protect.
States with Restrictive Approaches
Several states enforce non-competes but with significant limitations:
Colorado: Prohibits non-competes except for executive employees, employees who constitute professional staff to executives, and in sale-of-business contexts. Recent legislation further limited enforcement.
Massachusetts: Prohibits non-competes for non-exempt employees, requires “garden leave” or other consideration for enforcement, and limits duration to 12 months.
Washington: Prohibits non-competes for employees earning less than a threshold amount and requires that employers provide notice of non-compete provisions.
States with Moderate Enforcement
Many states enforce reasonable non-competes but scrutinize them carefully:
New York: Enforces non-competes that are reasonable in scope and necessary to protect legitimate business interests. Courts examine duration, geography, and the employee’s role carefully.
Illinois: The Freedom to Work Act prohibits non-competes for employees earning $75,000 or less, requires notice, and imposes other requirements.
Florida: Enforces non-competes but requires clear and convincing evidence of legitimate business interest. Statute specifies what constitutes legitimate business interests and presumptively reasonable time periods.
States That Readily Enforce Non-Competes
Some jurisdictions are more employer-friendly:
Georgia: Generally enforces reasonable non-competes, with specific statutory provisions for different contexts.
Texas: Enforces non-competes that are ancillary to an otherwise enforceable agreement and contain reasonable limitations.
Louisiana: Has specific statutory requirements for non-competes but generally enforces them when properly drafted.
The “Blue Pencil” Doctrine and Reformation
When courts find non-compete provisions overly broad, they may respond in different ways:
Blue Penciling
Some states allow courts to “blue pencil” agreements by striking unreasonable provisions while enforcing the remainder. For example, if a five-year restriction is unreasonable but two years would be acceptable, the court might strike the five-year term and enforce a two-year restriction.
Reformation
Other states allow courts to reform or rewrite provisions to make them reasonable. Courts might change a nationwide restriction to a regional one, or reduce a three-year period to one year.
All-or-Nothing Approach
Some jurisdictions take an all-or-nothing approach: if a non-compete is unreasonable, the entire provision is unenforceable. This approach aims to discourage employers from drafting overly broad agreements hoping courts will narrow them.
Special Contexts
Certain situations receive special treatment:
Sale of Business
Non-competes in the context of business sales are generally enforced more readily and may be broader than employment non-competes. Courts recognize that buyers need protection for the goodwill they purchase.
Partnership and LLC Agreements
Non-competes among business partners typically receive more deference than employment non-competes, as partners are presumed to negotiate from more equal bargaining positions.
Physicians and Healthcare
Many states impose special restrictions on physician non-competes, recognizing public interests in healthcare access. Some prohibit them entirely; others scrutinize them more carefully.
Low-Wage Workers
Recent legislative trends prohibit or restrict non-competes for low-wage employees who typically have no access to trade secrets or specialized training.
Recent Legal Developments
Non-compete law is evolving rapidly:
FTC Proposed Rule
In January 2023, the Federal Trade Commission proposed a rule that would ban non-compete clauses nationwide, with limited exceptions. As of the article date, this rule has been challenged in court and its future is uncertain. Businesses should monitor these developments closely.
State Legislation
Many states have recently enacted legislation restricting non-competes, reflecting growing concern about their impact on workers. Trends include:
- Salary thresholds below which non-competes are prohibited
- Required notice provisions
- Mandatory garden leave or other compensation
- Disclosure requirements
Judicial Trends
Courts increasingly scrutinize non-competes, particularly for lower-level employees, and narrow construction is becoming more common.
Practical Considerations for Employers
If you’re an employer seeking to use non-competes:
Know Your State’s Law
Non-compete enforceability is highly jurisdiction-specific. Consult with counsel familiar with your state’s requirements.
Draft Carefully
- Tailor agreements to specific roles and legitimate interests
- Use reasonable geographic and time restrictions
- Clearly define prohibited activities
- Include severability clauses
- Provide adequate consideration
- Ensure compliance with notice and other statutory requirements
Consider Alternatives
Non-competes aren’t the only option. Consider:
- Non-disclosure agreements protecting confidential information
- Non-solicitation agreements preventing customer or employee raiding
- Intellectual property assignments
- Garden leave provisions
Choose Governing Law Carefully
For multi-state businesses, carefully consider which state’s law will govern non-compete agreements.
Be Prepared to Litigate
Enforcing non-competes typically requires quick action to seek preliminary injunctions before competitive harm occurs.
Practical Considerations for Employees
If you’re subject to a non-compete:
Read the Agreement Carefully
Understand what’s prohibited, for how long, and in what geographic area.
Consider Negotiation
Non-competes are often negotiable, especially for senior positions. Try to narrow scope, duration, or geography.
Document Everything
If you’re leaving for a competitor, document that you’re not using trade secrets or confidential information.
Seek Legal Advice
Before signing or if you want to leave, consult with an attorney about enforceability in your state.
Consider the Risks
Even if you believe a non-compete is unenforceable, defending against litigation is expensive and stressful.
How Anunobi Law Can Help
At Anunobi Law, we have extensive experience with non-compete agreements from both employer and employee perspectives. We help employers draft enforceable non-competes that protect legitimate business interests while complying with applicable law. For employees, we analyze the enforceability of restrictive covenants and defend against overreaching enforcement efforts.
Our services include:
- Drafting non-compete agreements tailored to specific jurisdictions and circumstances
- Reviewing and negotiating restrictive covenants
- Analyzing enforceability under applicable law
- Prosecuting and defending non-compete litigation
- Seeking injunctive relief to enforce or invalidate non-competes
- Advising on compliance with evolving non-compete laws
Whether you’re an employer seeking to protect your business or an employee facing restrictive covenants, we provide sophisticated counsel to protect your interests.
Legal Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Non-compete law varies significantly by jurisdiction and depends heavily on specific facts and circumstances. This article does not address the law of every state, and laws are subject to change. For advice regarding your specific situation, please consult with a qualified attorney in your jurisdiction. Reading this article does not create an attorney-client relationship.