Noncompete Clause Developments – 2025
By Charles C. Shulman, Esq.
I. Introduction – FTC Noncompete Ban Stayed; State Law Noncompete Bans or Restrictions
The Federal Trade Commission on May 7, 2024 published a ban on almost all noncompete clauses as an unfair method of competition, effective September 4, 2024. However, the U.S. District Court for the Northern District of Texas, in Ryan LLC v. Federal Trade Commission, ruled on August 20, 2024, that the FTC noncompete ban exceeds the FTC authority and the noncompete ban is set aside and may not be enforced against anyone and cannot take effect on Sept. 4, 2024 or thereafter. The FTC filed a notice of appeal to the Fifth Circuit on October 18, 2024. However, under the Trump administration, on March 7, 2025 the Trump-appointed FTC commissioner has asked for a 120-day continuance as to whether regarding whether to continue its Fifth Circuit appeal of this decision. It is anticipated that the Trump-controlled FTC will drop its appeal and the FTC ban will be void.
State laws in 14 states have recently banned some or all types of noncompete provisions, and the state laws are not subject to the Federal court challenges. Also, noncompete provisions, even prior to FTC and state legislation, were subject to restrictions by state court case-law.
II. FTC Noncompete Clause Ban and Court Challenges
A. FTC Rules Banning Practically All Noncompete Provisions – On May 7, 2024, the Federal Trade Commission (FTC) published final rules that would ban all noncompete clauses as an unfair method of competition, and therefore violating Section 5 of the Federal Trade Commission Act (with the exception of grandfathered agreements in effect on Sept. 4, 2024, which can continue to be enforced for senior executives, i.e., earning over $151,164 and in a policy-making position).[1] The effective date of the FTC noncompete ban would be 120 days after publication, i.e., September 4, 2024. This rule: (i) would prohibit employers from entering into noncompete agreements and other clauses with all employees or service providers (“workers”); and (ii) would prohibit enforcement of existing noncompete clauses against all workers (with the exception of grandfathered agreements in effect on Sept. 4, 2024, which can continue to be enforced for senior executives). These FTC rules were designed to protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation.[2]
B. Federal Courts Strike Down FTC Noncompete Ban; FTC Likely to Drop Appeal
1. FTC Noncompete Ban Struck Down by District Court in Texas and Florida – Ryan LLC v. Federal Trade Commission, 746 F.Supp.3d 369 (N. Dist. Tex. Aug. 20, 2024), held that the FTC exceeded its authority in promulgating the noncompete ban, Congress did not give the FTC authority to impose new substantive restrictions, the authority of the FTC to issue regulations was only for housekeeping rules and not for new substantive restrictions and the FTC acted in an arbitrary and capricious in issuing the regulations; therefore the district court granted the plaintiffs’ motion for summary and held that the FTC noncompete rules are invalid and may not be enforced at all on September 4, 2024 or any time thereafter.[3] Similarly, Properties of the Villages, Inc. v. Federal Trade Commission, 2024 WL 3870380 (M.D. Florida Aug. 15, 2024), granted the plaintiff’s motion for stay of the effective date and preliminary injunction, although the relief requested was limited just to the plaintiff.
The district court in Pennsylvania reached a different result in ATS Tree Services, LLC v. Federal Trade Commission, 2024 WL 3511630 (E.D. Pa., July 23, 2024) (district court denied ATS Tree Services motion to stay and preliminary enjoin enforcement of the FTC noncompete ban because it did not find any irreparable harm).
2. Republican Chairman of FTC Files Motions to Hold in Abeyance the Appeals for 120 Days. The FTC had initially filed notices of appeal to the Fifth Circuit on October 18, 2024 and to the Eleventh Circuit on Sept. 24, 2024. But on March 7, 2025 and April 7, 2025, the Trump-designated chairman of the FTC, Andrew Ferguson, filed motions to hold the appeals in abeyance for 120 days. It is anticipated that the Trump-controlled FTC will withdraw the appeals and the district court stay will remain, thus basically voiding the FTC noncompete ban.
3. NLRB – The NLRB General Counsel under President Biden issued memorandum in 2023 and 2024 stating that noncompete provisions would violate the NLRA. However, the Acting General Counsel of the FTC under President Trump has rescinded the above two memoranda on Feb. 14, 2025.
III. States that Have Banned Noncompete Provisions
A. Several States Ban All Noncompete Agreements – In the past several years, California, Minnesota, North Dakota and Oklahoma have passed broad legislation banning post-employment noncompete agreements, regardless of salary. (California has had long-standing statutory law that voids most noncompete provisions (California Business & Professional Code §16600), but this was expanded by state law January 1, 2024 even as to out-of-state contracts.)
B. A Number of States Ban Noncompete Agreements for Non-Highly Paid Employees – Colorado, Illinois, Maine, Maryland, Massachusetts, New Hampshire, Oregon, Virginia, Washington, Wyoming and the District of Columbia have all passed laws in the past few years prohibiting post-employment noncompete agreements unless the employee earned above a certain threshold.
C. A Growing Number of States Prohibit or Restrict Noncompete Agreements for Physicians or Health Care Workers – In the past few years, a number of states, e.g., Connecticut, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Montana, New Hampshire, New Mexico, Pennsylvania, Rhode Island, South Dakota, Texas and West Virginia, have banned noncompete covenants for physicians or other health care providers in various circumstances.
D. New York and New Jersey – In New York bills in 2023 and 2025 would ban almost all noncompete agreements, but have been opposed by Governor Hochul because they are overbroad. Two bills were introduced in New Jersey in May 2025 that would severely restrict noncompete agreements.
IV. State Caselaw Regarding Noncompete Agreements.
A. Existing States’ Case-law Would be Applicable Absent a Statutory Ban – Even absent a broad FTC or state-statute ban on noncompete agreements, existing state case-law often restricts noncompete agreements.
B. Enforceability of Noncompete Agreements – State caselaw varies regarding enforceability of noncompete provisions. Generally, noncompete provisions will be enforced in most states if the restrictions are reasonable in geographical scopeand reasonable in time period, and they are necessary to protect legitimate business interests.
For example, in New York, which is fairly liberal in allowing noncompete restrictions, the noncompete restrictions will be enforceable if: (i) the time period of restriction is reasonable, (ii) the geographical scope is reasonable, (iii) the burden on the employee is not unreasonable, (iv) public policy is not harmed, and (v) the restrictions are necessary for the employer’s protection (Service Systems Corp. v. Harris, 341 N.Y.S.2d 702 (4th Dep’t 1973); Mallory Factor Inc. v. Schwartz, 146 A.D.2d 465, 536 N.Y.S.2d 752 (1st Dep’t 1989); International Paper Co. v. Suwyn, 951 F. Supp. 445 (S.D. N.Y. 1997)). In New Jersey noncompete restrictions will be enforced only if reasonable under the circumstances (Community Hosp. Group, Inc. v. More, 183 N.J. 36, 869 A.2d 884 (2005)).
C. Blue-penciling Noncompete Agreements – Where noncompete provisions are overbroad and therefore unenforceable on their terms, a number of state cases will “blue pencil” the restrictive covenants to a limited scope for which they would be enforceable.Often, employment agreements will add language to specifically provide for blue penciling. In New York restrictive covenants have traditionally been blue penciled by the courts.[4] However, some recent cases in New York have refused to partially enforce overbroad noncompete agreements.[5]
[1] Federal Trade Commission New Final Noncompete Clause Rule in 26 CFR § 910, announced by the FTC on April 23, 2024, and published in 89 Fed. Reg. 38342 (May 7, 2024).
[2] The following are the key provisions in the FTC noncompete ban, as discussed in my August 5, 2024 post: (a) Ban on Noncompete Clauses – Under the FTC rule, it would be an unfair method of competition for a person (including an employee or independent contractor): (i) to enter into or attempt to enter into a noncompete clause; (ii) to enforce or attempt to enforce a noncompete clause; or (iii) to represent that the worker is subject to a noncompete clause. 16 CFR § 910.2(a)(1); the FTC’s final rule aims to enhance worker mobility, encourage entrepreneurship, and spur innovation by banning noncompete provisions and promoting a more dynamic economy; (b) Senior Executives Exception for Grandfathered Contracts – For senior executives, there would be an exception if the noncompete was entered into prior to the effective date of the FTC regulations (Sept. 4, 2024). “Senior executives” mean workers who (i) are in a policy-making position, and (ii) received annual compensation of at least $151,164 in the preceding year (or annualized if was employed for only part of the year; and “policy-making position” means the president, chief executive officer or equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority; 16 CFR § 910.1; thus, with respect to senior executives, any noncompete clauses entered into prior to Sept. 4, 2024 would continue to be enforced; 16 CFR § 910.2(a)(2); After the effective date, no new noncompete provisions can be entered into; (c) Notice Requirement – The new FTC rule provides that employers would need to provide notice to workers (other than senior executives) who are bound by an existing noncompete that they will not be enforcing any noncompete provisions against them. 16 CFR § 910.2(b)(1). The notice may be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or cell phone text message. 16 CFR § 910.2(b)(2)(b); The FTC rule would provide a model notice that employers can use for workers, which states how prior noncompetes may not be binding. 16 CFR § 910.2(b)(4) (figure 1); (d) Sale Exception – The Final Rule would not prohibit enforcement of noncompete clauses that are entered into with respect to the bona fide sale of a business, including a bona fide sale of (i) a business entity, (ii) an individual’s interest in a business entity or (iii) all or substantially all of a business entity’s operating assets; See 16 CFR § 910.3; (e) Only for Post-Employment Bans; Non-Solicitation Clauses – The FTC noncompete ban would specifically apply to post-employment noncompetes, so it does not affect restrictions on moonlighting in the same field. Non-solicitation clauses that do not prohibit or function to prevent a worker from switching jobs or starting a new business are generally not restricted by the FTC rule, as noted in the preamble to the 2024 final rule.
Points to consider re the FTC final rule: (i) employers should review their noncompete agreements; (ii) even if the FTC rule would be upheld, for executives in policy-making positions earning over $151,164, there would be a grandfather exception from the FTC noncompete ban if the agreement was entered into prior to Sept. 4, 2024 (and it could be beneficial to separate the noncompete from other terms of the employment agreement so that the noncompete can remain unaltered in its grandfathered form; but it is unclear whether the negotiated non-compete in connection with a separation would result in loss of grandfathered status for senior executives); (iii) garden leave agreements would not be covered by the FTC noncompete ban; and (iv) the FTC cannot assess civil penalties for using unfair methods of competition, but if an entity is ordered to cease and desist from FTC violations, monetary penalties can sometimes be obtained in court.
[3] Arguments made by the lawsuits included that: (i) the rules implicates the major questions doctrine, which would necessitate additional legal authority from Congress; (ii) the FTC rule is arbitrary and capricious under the Administrative Procedure Act because the evidence the FTC relies on cannot justify a nationwide ban of noncompetes in all situations; (iii) the FTC rule incorrectly expands what is a prohibited an unfair method of competition; and (iv) the rule unlawfully infringes on state contract laws.
[4] See, e.g., Deborah Hope Doelker, Inc. v. Kestly, 87 A.D.2d 763, 449 N.Y.S.2d 52 (1st Dep’t 1982); Muller v. N.Y. Heart Ctr. Cardiovascular Specialists P.C., 238 A.D.2d 776, 656 N.Y.S.2d 464, 465 (3d Dep’t 1997); BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854, 712 N.E.2d 1220 (1999).
[5] Flatiron Health, Inc. v. Carson, 2020 IER Cases 103,629, 2020 WL 1320867 (S.D.N.Y. March 20, 2020) (court refused to enforce an overbroad noncompete provisions in a Covenants Agreement that all new employees must sign, which prohibits former employees for doing any work for one year in a broad group of competing businesses; court acknowledged the judicial power to grant partial enforcement of overbroad restrictive covenants (blue-pencilling), but it found that the employer did not demonstrate its entitlement to partial enforcement as the noncompete covenant was facially overbroad, restricting any employment of all former employees with a large group of employers where the former employer had no legitimate business interest); Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364, 12 N.Y.S.3d 606 (2015) (NY Court of Appeals refused to issue summary judgment for former employer in connection with nonsolicitation provisions in former employee’s employment agreement; nonsolicitation covenant was overbroad as it prohibited former employee from working for any of the former employer’s customers, even those the former employee had not done any work with and was imposed as a requirement of initial employment; partial enforcement (blue pencil) is appropriate only if employer demonstrates an absence of overreaching, coercive use of dominant bargaining power, or other anticompetitive misconduct). See also, Kodiak Building Partners, LLC v. Adams, 2022 WL 5240507 (Del. Ch. Oct. 6, 2022) and Fortiline, Inc. v. McCall, 2024 WL 4088629 (Del. Ch. Sept. 5, 2024) (recent line of Delaware Chancery Court cases that refused to partially enforce (blue pencil) an overbroad noncompete agreement).
