The majority of U.S. states recognize and enforce various forms of non-compete agreements. A few states, such as California, North Dakota, Oklahoma, and Minnesota totally ban noncompete agreements for employees, or prohibit all noncompete agreements except in limited circumstances.
Prevalence and status Data from 2018 indicates that non-compete clauses cover 18 percent of American labor force participants. A 2023 petition to the FTC to ban non-compete agreements estimated that about 30 million workers (about 20% of all U.S. workers) were subject to a noncompete clause. While higher-wage workers are comparatively more likely to be covered by non-compete clauses, non-competes covered 14 percent of workers without college degrees in 2018. By some estimates, nearly half of all technical workers are covered by non-compete agreements.
Federal law In March 2019, Democratic officials, labor unions, and workers' advocacy groups urged the U.S. FTC to ban non-compete clauses. A petition to the FTC, seeking a ban on noncompete clauses, was submitted by the AFL-CIO, SEIU, and Public Citizen. In July 2021, President Joe Biden signed Executive Order 14036, directing the FTC (whose chair, Lina Khan, he had recently appointed), as well as other federal agencies, to "curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility". On January 5, 2023, the FTC proposed a rule banning non-compete agreements.
The U.S. Chamber of Commerce has lobbied against bans on non-compete agreements; in 2023, it threatened to sue the FTC if it bans non-compete agreements. The Chamber argued that "noncompete agreements are an important tool in fostering innovation and preserving competition".
Federal Trade Commission On April 23, 2024, the Federal Trade Commission (FTC) issued a ban on nearly all non-compete agreements. The rule was published on the Federal Register on May 7 and the ban was scheduled to go into effect on September 4, 2024.
The FTC found as shown the use of non-compete clauses by employers has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force—including workers not bound by non-compete clauses and that by suppressing labor mobility, non-compete clauses have negatively affected competition in product and service markets in several ways. The commission noted that the existing legal frameworks governing non-compete clauses—formed decades ago, without the benefit of this evidence—allow serious anticompetitive harm to labor, product, and service markets to go unchecked. The Commission noted "that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker's labor services by improving wages and working conditions." In 2024, approximately one in five American workers, or about 30 million people, are subject to noncompetes.
On August 20, 2024, Judge Ada Brown of the District Court for the Northern District of Texas issued an injunction blocking the rule, ruling that the FTC "lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious." On October 18, 2024, the FTC appealed the ruling to the U.S. Court of Appeals for the Fifth Circuit.
Laws by state California Non-compete agreements are automatically void as a matter of law in California, except for a small set of specific situations expressly authorized by statute.Cal. Bus. & Prof. Code § 16600 ("Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."); see e.g. Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008). They were outlawed by the original California Civil Code in 1872 (Civ. Code, former § 1673).
Enforcement of out-of-state agreements A leading court decision discussing the conflict between California law and the laws of other states is the 1998 California 4th District Court of Appeal decision Application Group, Inc. v. Hunter Group, Inc.61 Cal. App. 4th 881 (1998). In Hunter, a Maryland company required that its Maryland-based employee agree to a one-year non-compete agreement. The contract stated that it was governed by and to be construed according to Maryland law. A Maryland employee then left to work for a competitor in California. When the new California employer sued in California state court to invalidate the covenant not to compete, the California court agreed and ruled that the non-compete provision was invalid and not enforceable in California. Business and Professions Code Section 16600 reflects a "strong public policy of the State of California" and the state has a strong interest in applying its law and protecting its businesses so that they can hire the employees of their choosing. California law is thus applicable to non-California employees seeking employment in California.
Whether California courts are required by the Full Faith and Credit Clause of the United States Constitution to enforce equitable judgments from courts of other states, having personal jurisdiction over the defendant, that enjoin competition or are contrary to important public interests in California is an issue that has not yet been decided.EMC Corp. v. Donatelli, Suffolk Superior Court, Civil Action 09-1727-BLS2 (2009).
Exceptions There are limited situations where a reasonable non-compete agreement may be valid in California. Where the owner of a business is selling the entire business, or is selling the goodwill in the business, the seller may be bound by a non-compete clause.Cal. Bus. & Prof. Code § 16601. When there is a dissolution or disassociation of a partnership.Cal. Bus. & Prof. Code § 16602. Where there is a dissolution of a limited liability company.Cal. Bus. & Prof. Code § 16602.5.
Colorado Non-compete agreements in the state of Colorado are generally void unless they fall into a few select exceptions. Those exceptions include "(a) Any contract for the purchase and sale of a business or the assets of a business; (b) Any contract for the protection of trade secrets; (c) Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years; and (d) Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel." At the time the statute was enacted, Colorado's approach to regulating non-compete agreements was a unique approach.James R. Krendl & Cathy S. Krendl, "Noncompetition Covenants in Colorado: A Statutory Solution", 52 Denver Law Journal 499, 504 (1975).
Florida The enforceability of non-compete agreements in the state of Florida is quite common. Some law firms build their law practice around these agreements and represent employees, employers and potential new employers of an employee currently bound by a non-compete agreement. The agreement is not allowed to be overly broad and generally difficult to enforce if it is for more than two years. However, Florida courts will rarely refuse to enforce a non-compete agreement due to its length or geographic scope. Instead, under Florida law, courts are required to "blue pencil" an impermissibly broad or lengthy non-compete agreement to make it reasonable within the limits of Fla. Stat. § 542.335. Also if the agreement is part of a general employment contract then there is the possibility of a prior breach by an employer. This may cause the non-compete clause of the contract to become unenforceable. However, recent case law from Florida's appellate courts may reduce the scope of the prior breach defense.
Hawaii A new law bars high-tech companies, but only such companies, in Hawaii from requiring their employees to enter into "non-compete" and "non-solicit" agreements as a condition of employment. The new law, Act 158, went into effect on July 1, 2015.
Illinois Non-compete agreements will be enforced in Illinois if the agreement is ancillary to a valid relationship (employment, sale of a business, etc.) and (1) must be no greater in scope than is required to protect a legitimate business interest of the employer, (2) must not impose an undue hardship on the employee, and (3) cannot be injurious to the public.Reliable Fire Equipment Co. v. Arredondo, 2011 IL 111871 (2011). While reasonable geographic and temporal limitations on the non-compete agreement are not expressly required by governing law, they tend to be examined as a measure of whether the scope of the non-compete is greater than is required to protect a legitimate business interest of the employer.Bires v. Waltom, Case No. 8-4680 (2009).
Unlike other jurisdictions, which follow the general rule that consideration is only important as to whether it exists and not as to whether it is adequate, Illinois will inquire into the adequacy of consideration.Fifield v. Premier Dealer Services, 993 N.E.2d 938, 942 (Ill. App. Ct. 1st Dist. 2013) (2013). The majority of courts will require at least two years of continued at-will employment to support a non-compete agreement (or any other type of restrictive covenant). However, in certain cases involving particularly sharp conduct by an employee, courts have required less.
While Illinois courts state the rule above, logically the analytical steps should be in reverse order—because inadequate consideration is fatal to the claim. Thus, under McInnis v. OAG Motorcycle Ventures, Inc.McInnis v. OAG Motorcycle Ventures, Inc. 2015 IL App (1st) 130097 (June 25, 2015) there are three requirements in order for a post employment restrictive covenant limiting a former employee's right to work for a competitor to be enforceable under Illinois law: it must be ancillary to a valid contract; it must be supported by adequate consideration; and it must be reasonable, considering whether it: (a) is no greater than is required for the protection of a legitimate business interest of the employer, (b) does not impose undue hardship on the employee, and (c) is not injurious to the public.
The McInnis decision interpreted the Fifield decision, above, to mandate two years' employment in order for consideration to be adequate.
Before January 1, 2021, the Illinois Freedom to Work Act prohibited employers from entering into a covenant not to compete with Illinois employees earning the greater of (1) the hourly rate equal to the minimum wage required by the applicable federal, State, or local minimum wage law or (2) $13.00 per hour.
The Illinois legislature passed an amendment to the Illinois Freedom to Work Act in 2021, that will take effect on January 1, 2022, which prohibits employers from entering into a non-compete agreement with an employee unless the employee earns over $75,000 per year.
The law codified the Illinois common law conditions that the non-compete agreement must (1) be reasonably necessary to protect the legitimate business interest of the employer, (2) be ancillary to a relationship or valid contract, and (3) be reasonably supported by adequate consideration.
One legitimate business interest that Illinois law protects is long-term relationships between a business and its customers.
Additionally, the law further codified the common law concerning non-compete agreements in that (1) a non-compete covenant must be no greater than is required for the protection of a legitimate business interest of the employer, (2) the non-compete covenant must not impose an undue hardship on the employee, and (3) the non-compete covenant must not be injurious to the public.