States Are Charting Their Own Course on Employment Noncompetes

States haven’t heeded the Federal Trade Commission’s call for a single nationwide prohibition of all employment noncompetes that it first articulated over a year ago in its proposed rule. The final rule, released April 23, would ban all past, present, and future non-competition agreements in the US (except existing noncompetes with “senior executives” earning more than $151,164).

Instead, some states have continued to enact new state laws that restrict (but don’t ban) the enforcement of non-competes. Others continue to allow their courts to decide the enforcement on noncompetes on a case-by-case basis. A few other states enacted their own state-specific bans of noncompetes.

What all these states share in common is a determination to identify their own solutions through court enforcement or new state legislation—without regard for the FTC’s action.

State noncompete initiatives in recent years have evolved into three categories: states that follow California in prohibiting all employment noncompete agreements in the state; states that have enacted legislation, setting salary-based thresholds, notice and disclosure obligations, and, sometimes, penalties for violations; and states that have decided to continue to rely on long-standing court-adopted restrictions on noncompetes.

State-Specific Bans

California broadly prohibited most noncompete agreements over a century ago, but it continues to enact new restrictions. Its rules against noncompetes now have an extra-territorial effect through its new law that requires California-centric choice of law and forum selection provisions in noncompetes affecting employees who live or work in California.

For example, if an employee moves from Texas to California, the employee can avoid enforcement of a noncompete that was drafted under Texas law because the new California law requires that a court decide the case under California law—lex forum over lex loci contractus.

Last year, Minnesota joined California, Oklahoma, and North Dakota by enacting its own state law banning noncompetes. More recently, the New York state legislature passed a bill that would have banned noncompetes, but Governor Kathy Hochul vetoed it.

As a result, only four states currently ban noncompetes. However, all states prohibit enforcement of noncompetes in specific professions, such as law, health care, broadcasting, and others. Iowa and Kentucky recently enacted professional exemptions for health-care workers.

Restrictions, Not Bans

Other states continue to eschew the importance of a national rule on noncompetes, searching instead for their own solutions based on the economic and political climate. When Hochul last winter vetoed legislation that would have banned most noncompetes, she reportedly did so in response to lobbying from the financial services industry. As a result, New York is now reportedly considering legislation to impose a salary threshold for enforcement of non-competes.

Thus, New York may soon join the growing number of states that recently enacted statutory restrictions such as salary thresholds that preclude enforcement of noncompetes if the employee earns less than the salary threshold. Colorado, Illinois, Maine, Maryland, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, and Washington are among these states, but each enacted different salary thresholds that often change every year, again rejecting any call for a single national rule on the enforcement of noncompetes.

The District of Columbia went through a process that was similar to New York’s. In 2020, it adopted an outright ban that was similar to California, but by 2022, the legislature identified problems and amended the ban to provide for salary thresholds and other restrictions. As a result, Washington, D.C. is now aligned with the majority of states that have taken action on the enforcement of noncompetes in recent years.

Common-Law Restrictions

Even states that haven’t enacted new laws on noncompetes adopted longstanding restrictions on their enforcement through court decisions. State courts in all states created restrictions based on the duration and geographical scope of the agreements, and on whether the employer had a “legitimate protectible interest” in the enforcement of the noncompete. This continues despite the pendency of the FTC final rule.

Existence and enforcement of state-law restrictions have been recognized as reasons federal courts haven’t restricted enforcement of non-competes under federal antitrust law. Despite this, the FTC, in purporting to impose a nationwide prohibition on noncompetes, has asserted that noncompetes between employers and employees violate federal antitrust law and the Federal Trade Commission Act.

However, most states appear unpersuaded by the FTC’s call for a nationwide ban on noncompetes. Instead, they continue to create their own rules, either through new laws or by continuing to permit courts to define the boundaries of an enforceable noncompete agreement.

Until it becomes clear if the FTC’s nationwide ban will stick, states appear intent on continuing to plot their own courses through court decision-making and state legislative action.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Paul Starkman is an employment attorney at Clark Hill.

Daniel Kinsella is senior counsel at Clark Hill.

Write for Us: Author Guidelines