At a Glance
- 2023 proved to be a very busy year for those monitoring developments in the area of noncompetition law.
- We highlight 10 major state and federal developments from 2023 in the area of employee noncompetion law, including increased state and federal efforts to outright ban their use.
2023 was an eventful year for those following state and federal noncompete law developments. Federal agencies, state legislatures and courts continued to take steps to narrow the circumstances under which noncompetition agreements may be enforced. Some of those steps led to new law, while others did not. But one certainty remains, the noncompete law landscape is rapidly evolving and employers — especially multi-state employers — should continue to pay close attention.
Here is our list of the top 10 noncompete developments of 2023:
1. Minnesota Institutes Noncompete Ban: On July 1, 2023, Minnesota became the fourth state to impose a complete ban on noncompete agreements (joining California, Oklahoma and North Dakota). Minnesota’s new noncompete law voids any post-employment noncompete agreement entered into on or after July 1, 2023, with any employee or independent contractor, with only two very limited carveouts for noncompetes agreed upon (1) in connection with the sale of a business or (2) in anticipation of the dissolution of a business. Subject to those limited exceptions, the law prohibits the use of any agreement between an employee or independent contractor and an employer that restricts the employee/contractor, after termination of employment, from performing: (1) work for another employer for a specified period of time: (2) work in a specified geographic area; or (3) work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement. The new law does not prohibit the use of nondisclosure, confidentiality, trade secret, or certain non-solicitation agreements (including specifically those restricting the ability to use client or contact lists). It also does not prohibit agreements that restrict an employee or independent contractor from competing while employed. In addition to the noncompete ban, the new law also prohibits employers from requiring employees who reside and work in Minnesota to agree, as a condition of employment, to an agreement or contract containing a non-Minnesota choice of law or choice of forum provision for claims and controversies arising in Minnesota.
2. Not to Be Outdone, California Places an Exclamation Mark on its Noncompete Ban: California law has for some time treated agreements that restrain one from engaging in a lawful profession, trade, or business as void and unenforceable, absent an exception. Citing to a California Supreme Court precedent which voided a post-employment non-compete, California enacted a new law effective January 1, 2024 that prohibits employers from including or attempting to enforce a noncompete clause in an employment contract, or otherwise requiring an employee to enter a noncompete agreement, unless an exception applies. In addition, the new law requires that employers give written notice by February 14, 2024, to current California employees who are signatory to an agreement with void noncompete provisions, and former California employees employed after January 1, 2022, who entered into such an agreement. The written notice must be individualized and delivered to both the employee’s last known address and email address. Finally, the new law creates a private right of action for employees to enforce the new law, and to recover damages, fees and costs in enforcing the statute.
3. The Federal Trade Commission (FTC) Proposes a Nationwide Ban on Noncompetes: On January 5, 2023, the FTC proposed a sweeping nationwide ban on employee noncompete agreements. The FTC invited public comment on the proposed regulation until late April 2023, and has not taken any subsequent action. Current indications are that the FTC will proceed to finalize the proposed rule, perhaps with some edits in response to public comment, in the spring or summer of 2024. Once the final rule is published, we expect legal challenges as to the enforceability of any such rule based on arguments that the FTC lacks the statutory and constitutional authority to issue such a ban.
4. The National Labor Relations Board (NLRB) Aims to Limit Noncompete Agreements: On May 30, 2023, the General Counsel for the NLRB, Jennifer Abruzzo, issued guidance regarding the lawfulness of noncompete agreements. The General Counsel’s guidance warned employers that, absent special circumstances justifying the restriction, most noncompete agreements violate the National Labor Relations Act (NLRA). The General Counsel’s memorandum is not law, so no law has changed as a result of the guidance memorandum. However, the memorandum carries significance because of the General Counsel’s authority to control the issuance of complaints by NLRB regional offices. Since the memo’s issuance, NLRB Regional Offices have filed a number of cases against employers alleging, among other things, that requiring employees to enter into noncompete agreements violates their concerted activity rights under the NLRA. Some employers are pushing back, and litigation in those cases remains ongoing. Employers can expect the NLRB Regional Offices to continue to file cases against employers related to noncompete agreements.
5. New York Legislature Passes Noncompete Ban, but Governor Vetoes the Legislation: On June 20, 2023, the New York State Legislature passed a bill to prohibit any future use of noncompete agreements in that state. The law was sent to Gov. Kathy Hochul, who had until the end of 2023 to sign or veto the legislation. Gov. Hochul vetoed the legislation on December 22, 2023. In remarks to the press before issuing the veto, the governor signaled her desire to see the law modified to focus on protecting low and middle-income workers, (i.e., by potentially limiting the ban to individuals earning less than $250,000/year). However, during the final negotiations, the governor and lawmakers could not agree on the compensation threshold and how it should be calculated. As the year’s legislative session had already come to a close, there was no opportunity for the legislature to override the veto. Stay tuned for a renewed push by the New York State Legislature in 2024 to pass similar legislation.
6. New Maryland Law Takes Effect: As of October 1, 2023, Maryland employers are barred from creating a noncompete provision in an employment contract for an employee who earns equal to or less than 150% of the state minimum wage. Maryland’s prior law had a threshold equal to or less than $15 per hour or $31,200 annually. Through this new law, Maryland joins a number of states which have compensation thresholds, including ones that are tied to a figure that may update annually (e.g., tied to poverty levels, federal or state minimum wage or other factors).
7. Indiana Physician Agreements: As of July 1, 2023, Indiana amended its Physician Noncompete Agreements Law in a number of ways. The law now prohibits noncompete agreements with primary care physicians. The law further makes physician noncompete agreements entered into after July 1, 2020, unenforceable when (1) the employer terminates the physician’s employment without cause, (2) the physician terminates their employment for cause, or (3) the physician’s employment contract expired, and both the physician and employer fulfilled all obligations under the contract. The law does not define “cause,” leaving open significant ambiguity and room for litigation. The law further established a physician buyout process to purchase a release from noncompete agreements. If a physician elects to exercise the buyout option and duly notifies the employer of such, the employer is required to negotiate in “good faith” to determine a “reasonable” buyout purchase price.
8. Delaware’s Chancery Court Continues to Push Back on Delaware Choice of Law Provisions: In a series of cases in 2023, the Delaware Court of Chancery continued to issue decisions reflecting a healthy skepticism both for enforcement of noncompete agreements and Delaware choice of law provisions. As we reported earlier this year, in Hightower Holding, LLC v. John Gibson, C.A. No. 2022-0086-LWW, memo. op. (Del. Ch. Feb. 9, 2023), the court denied plaintiff’s request for a preliminary injunction, declining to apply Delaware law because there were insufficient facts to uphold a Delaware choice of law provision when the only tie to Delaware was the plaintiff’s state of incorporation. Then, in Frontline Techs Parent LLC v. Murphy, C.A. 2023-0546-LWW (Del. Ch. Aug. 23, 2023), the court declined a subsidiary’s attempt to enforce a noncompete provision benefitting the parent. A week later, in Centurion Service Group, LLC v. Wilensky, C.A. No. 2023-0422-MTZ (Del. Ch. Aug. 31, 2023), the court declined to enforce a noncompete on the grounds that the scope of the intended restriction was unreasonably overbroad. Based on these decisions, employers should reevaluate the use of Delaware choice of forum provisions in noncompete agreements where the only connection to Delaware is the employer’s state of incorporation.
9. The District of Columbia Gets Serious About Enforcement: In what appeared to be the first publicly announced enforcement of the District of Columbia’s noncompete law, the District of Columbia’s attorney general announced in November 2023 that three employers would be required to pay more than $150,000 (in addition to other remedies) for violating the District of Columbia’s ban on noncompete agreements.
10. Despite the Above, Courts Continue to Enforce the Use of Noncompete Agreements: While the above developments may suggest that all is lost for employers seeking to protect confidential information and customer goodwill relationships through the use of noncompete agreements, state and federal courts continue to enforce noncompete agreements in many jurisdictions. And as noted above, some courts are pushing back on federal agency efforts to proscribe the use of noncompete agreements. For example, on December 7, 2023, in Noble Supply & Logistics, LLC v. Curry, No. 5:23-cv-00065 (W.D. Va. Dec. 7, 2023), the Western District of Virginia granted a motion for summary judgment in which it, part, rejected the former employee/defendant’s argument that the noncompete violated the NLRA (under the theories put forth by the NLRB earlier in the year).
