Updates on Non-Compete Law in NY, CT, and Nationally

Non-compete agreements have received a great deal of attention in recent years and the frequent updates on court rulings and the like can lead to some confusion. We receive inquiries on this subject every single week, and hope this blog post can serve as a supplement to our February 23, 2024 post regarding non-compete agreements and help readers stay abreast of developments in New York and Connecticut as well as at the national level.

For relevant background, both New York and Connecticut considered bills limiting noncompete agreements in their respective states in 2023. In New York, a bill was passed by the NY State Senate that would ban all new non-competes, but ultimately vetoed by Governor Kathy Hochul who thought that the ban was too broad in its scope.[i] Instead, Hochul stated that she would support a bill that enforces non-compete agreements among high-wage employees in order to allow “New York’s business to retain highly compensated talent.”[ii] The Connecticut bill, which would have banned non-competes for workers earning less than three times minimum wage and independent contractors earning less than five times minimum wage, was never voted on by the CT House.[iii]

With those state laws, and the potential for new versions of them afoot, in April 2024 the Federal Trade Commission (FTC) announced a rule that banned non-compete agreements nationally. In its announcement of the rule, the FTC expressed its interest in “protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.” The FTC also emphasized the view that non-competes are often exploitative and place heavy burdens on workers. Under the FTC rule, only existing non-compete agreements for senior executives, defined as workers making more than $151,164 in a policy-making position, would remain in force.[iv][PB1]

On August 20, 2024, a federal judge in the Northern District of Texas struck down the FTC’s rule which was otherwise meant to go into effect on September 4, 120 days after the rule was announced in April. With this ruling from the Northern District of Texas, the rule will no longer go into effect.[v]

Specifically, the Texas court found that the rule was contrary to law because the FTC was not granted the power to regulate unfair competition practices under the provision of the FTC Act. The court also found that the rule’s “one-size-fits-all approach with no end date" was overbroad with no reasonable explanation. Thus, the court found that the rule violated the Administrative Procedure Act, which governs the way federal agencies create rules.[vi]

This decision on the merits of the FTC’s rule makes it completely ineffectual nationwide, at least for the time being. The FTC is likely to appeal this ruling to the Fifth Circuit Court of Appeals, so future developments are more than possible. Due to the national importance of non-competes in employment contracts and the questions this case raises about the rulemaking power of the FTC, it is not out of the question that this case could reach the Supreme Court, but that may not be for quite some time. While the rule remains ineffectual at the moment, both employees and employers should keep an eye out for news of an appeal and eventual decision from the Fifth Circuit.

As a result of the Texas court’s ruling, at present both local and national noncompete law remains largely unchanged. In 2023, a new Connecticut law placed a one-year, fifteen-mile limit on non-compete agreements for physicians, physician assistants, and registered nurses. Outside these professions, the standard is that non-compete agreements must be reasonable under a five-factor test.[vii] In New York, a non-compete agreement is permissible if it “(1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time period and geographic scope.”[viii]

For employees and small employers, the best takeaway is that bespoke solutions can and should be considered in negotiating restrictive covenants. Small employers should protect their interests, but be measured in their agreement drafting if they want to avoid uncertain and expensive legal fights which might result in findings that their non-competes are too broad. Employees should expect courts will be slightly more protective of their freedoms, but are best avoiding a cavalier approach to restrictive covenants as non-competes do have teeth and enforcement of them is still likely if they are reasonable in nature.

We look forward to guiding our clients through this process and anticipate quite a bit of litigation in the months and, potentially, years to come as the relative mobility of this country’s workforce continues to be fluid and the legal rules of work life continue to evolve.