Washington, D.C. — Efforts to establish a federal law prohibiting noncompete agreements have stalled, a situation compounded this month when President Donald Trump rescinded former President Joe Biden’s 2021 executive order directing the Federal Trade Commission to regulate such agreements. As a result, state laws will remain the determining factor for the validity of noncompete clauses for the foreseeable future.
The difference in state legislation is causing significant confusion for employers, who must now navigate a patchwork of rules that govern the enforceability of noncompete agreements. In a striking example, Florida enacted the CHOICE Act on July 1, strengthening the enforceability of these agreements, while Wyoming passed a law on the same day that outright bans noncompetes. This trend aligns Wyoming with several other states, including North Dakota, Montana, Oklahoma, California, and Minnesota, which have also declared these agreements unlawful.
Other states, such as Louisiana, Maryland, Arkansas, and Oregon, have limited noncompete agreements but have stopped short of banning them entirely. Pennsylvania and New Jersey provide a stark contrast in their legal frameworks: in New Jersey, a noncompete can be lawful even if presented two months into an employment relationship, whereas Pennsylvania requires new consideration for enforceability in similar circumstances.
Furthermore, some states have enacted “low wage” thresholds that prevent the enforcement of noncompete agreements for employees earning below a specified income level. States like Colorado, Maine, Oregon, Rhode Island, Virginia, and Washington adjust these thresholds annually, adding another layer of complexity for employers drafting noncompete language.
As employers grapple with varying laws, an agreement that is enforceable in one state could prove invalid next door. For those operating across state lines, these inconsistencies complicate the process of drafting and enforcing noncompete agreements. However, strategic use of choice-of-law and jurisdictional clauses can help mitigate some of this uncertainty.
For multijurisdictional employers, understanding these legal variations is crucial for managing noncompete agreements effectively. Drafting processes must consider specific state statutes regarding enforceability, temporal or geographical limitations, wage thresholds, and the potential for courts to modify agreements. Legal counsel is increasingly advisable for employers to stay abreast of the rapidly evolving landscape of state legislation and judicial rulings.
One pivotal case underscored these challenges: the First Circuit’s ruling in DraftKings, Inc. v. Hermalyn last fall. The court rejected a former executive’s attempt to escape a Massachusetts noncompete by moving to California, asserting that the choice-of-law clause favored Massachusetts law, known for being more favorable to noncompete enforcement.
The ruling highlighted a broader trend of employees attempting to exploit favorable jurisdictions to challenge noncompete agreements. Another notable case involved a former AbbVie Inc. executive who filed a complaint in California seeking to invalidate noncompete and non-solicitation restrictions after AbbVie initiated proceedings in Illinois aimed at blocking her new employment.
With pending rulings and ongoing disputes across the country, the legal battle over noncompete agreements presents a growing challenge for employers. As this legal chess match unfolds, the intricate interplay of state laws promises continued complications and sleepless nights for those tasked with drafting these agreements.
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