Expanding Restrictions on Non-Competition and Non-Solicitation Provisions

Several states continue to limit the use of non-competition and non-solicitation restrictions:

• California: On September 1, 2023, California enacted SB 699, expanding the state’s ban on non-competition agreements in employment contracts. The new law extends the ban to contracts signed out-of-state, voiding noncompliant provisions regardless of where and when they were entered. The law also creates a private right of action for current, former, and prospective employees whose agreements contain such provisions, and allows recovery of attorney fees. Under the law, an employer commits a civil violation just by including an unlawful restrictive covenant in a contract. The law’s extraterritorial application raises a series of constitutional questions and application of the law to remote employees outside of California is yet to be determined.
• Minnesota: As of July 1, 2023, Minnesota joined the growing number of jurisdictions restricting the use of post-termination non-competition provisions in employment-related agreements. Minnesota’s legislature passed SF 3035, which bans most post-termination covenants not to compete entered into between employers and employees or individual independent contractors on or after July 1, 2023. Non-compliant provisions are void and expose employers to liability for attorney fees, among other remedies, for employees who enforce their rights under the law. The law also aims to prevent employers from circumventing the provisions by voiding contractual clauses that require an employee to adjudicate claims outside of Minnesota or otherwise deprive an employee of protection under Minnesota law. Specific exceptions include certain non-competes entered into in relation to the sale of a business, nondisclosure agreements, agreements designed to protect trade secrets or confidential information, non-solicitation agreements and agreements restricting the ability to use client or contact lists or solicit customers of the employer.
• New York: New York state also recently passed a law that would do the same pending the governor’s signature. If signed by the Governor, New York’s SB3100A will similarly ban most post-termination covenants not to compete entered into between employers and an employee or individual independent contractor. The bill creates carve outs for non-disclosure and non-solicitation agreements, as well as for agreements involving a fixed term of service. Non-compliant provisions are void and can expose employers to up to liability for up to $10,000 in liquidated damages. For more information, see our detailed coverage of this topic New York Non-Compete Law: What It Would Do.
• Georgia: A Georgia Court of Appeals in North American Senior Benefits v. Wimmer recently found that employee non-solicitation provisions are subject to Georgia’s Restrictive Covenant Act of 2011 (RCA), requiring such provisions to include a geographic limit and be narrowly tailored or risk being void. The RCA imposes limits on non-competition and customer non-solicitation provisions but is silent on its applicability to employee non-solicitation provisions. The court in Wimmer voided an employee non-solicitation provision that did not include a geographical limit, finding that an implied limit within the United States was insufficient. The court also found that such limits need to be expressly provided. Employers with Georgia-based employees should consider modifying restrictive covenant agreements to include geographical limits.
• Proposed FTC Rules: The Federal Trade Commission proposed a rule this year that would ban employers from imposing or enforcing non-competes on workers as an “unfair method of competition” under Section 5 of the FTC Act. Among other things, the proposed rule would make it illegal for an employer to:
  • Enter into or attempt to enter into a non-compete with a worker.
  • Maintain with a worker a non-compete clause.
  • Represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
The final vote on this proposed rule will take place in April 2024. For more information, see our previous coverage of this topic The FTC Proposes Rule to Ban Noncompete Clauses: What’s Next and What to Do.