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Know Your Limits: Understanding State-Imposed Restrictions on Noncompetes

Authors: Daryl G. Leon and Joseph C. O'Keefe, Proskauer Rose LLP

An estimated 30 million workers in the United States, roughly 18 percent of the American workforce, are subject to a noncompete agreement, according to the US Treasury Department and Federal Trade Commission. Noncompete agreements, which prohibit employees or contractors from providing services to competitive companies for a period of time after the end of their employment, have always been subject to judicial, legislative and agency scrutiny.

Currently, there is no federal statute or agency rule that provides a unified approach to noncompetes. In the absence of such a controlling federal noncompete statute or final executive agency rule, states have increasingly imposed a patchwork of regulations limiting which employees may be subject to noncompete agreements.

However, on January 5, 2023, the Federal Trade Commission (FTC) proposed a rule with a sweeping ban of noncompete agreements, which resulted in more than 25,000 public comments through the close of the comment period on April 19, 2023. Considering the FTC's proposed rule, it is prudent for employers to have a complete understanding of the categories of employees already protected from noncompetes by state law.

Understanding the current state laws, and particularly the areas where the states find common ground on these issues, may provide a fertile opportunity for employers to consider adopting broad policies on using noncompetes. This can help employers to avoid the potential adverse impacts (i.e., imposition of a federal ban that aligns with current state restrictions) of any final agency rulemaking and to "futureproof" their business interests.

Even if (as is likely) the FTC's authority to promulgate its proposed rule is challenged under the Federal Trade Commission Act or "major questions doctrine," state laws will still provide the prevailing regulation of noncompetes that employers must follow.

A thorough analysis of nationwide noncompete laws identifies several distinct categories of employees that states often protect from the use of noncompetes. These protections come in the form of limits, or outright prohibitions, on the use of noncompetes. Similarly, there are many other categories of employees whom the states permit to be bound by a noncompete.