Non-compete and non-solicitation agreements: how the framework actually works after the FTC's 2025-2026 rule vacatur

The federal non-compete regulatory landscape underwent substantial transformation between 2024 and 2026. On April 23, 2024, the Federal Trade Commission issued a final rule banning non-compete clauses nationwide under 16 CFR Part 910. The rule defined a "non-compete clause" broadly to include any term or condition of employment that "prohibits," "penalizes," or "functions to prevent" a worker from accepting other employment or operating a competing business. The rule was scheduled to take effect September 4, 2024, but was blocked by federal court injunction before that date. The substantial federal regulatory framework that briefly existed has been substantially dismantled, leaving non-compete enforcement primarily to state law with FTC pursuing case-by-case enforcement under Section 5 of the FTC Act for the most problematic agreements.

The procedural history is important for understanding the current framework. On August 20, 2024, U.S. District Judge Ada Brown in the Northern District of Texas struck down the FTC rule in Ryan LLC v. Federal Trade Commission, No. 3:24-cv-00986, finding the FTC exceeded its statutory authority and that the rule was arbitrary and capricious. The court determined the FTC lacks substantive competition rulemaking authority under Section 6(g) of the FTC Act for rules of this scope, and that the rule was unreasonably overbroad without sufficient justification. The Biden-administration FTC appealed the decision to the Fifth Circuit in October 2024. When Andrew Ferguson became FTC Chair under the Trump administration in January 2025, the FTC's approach shifted substantially. In September 2025, the FTC voted to vacate the rule and withdraw its appeals. In early 2026, the FTC officially removed 16 CFR Part 910 from the Code of Federal Regulations, completing the procedural dismantling of the rule.

The current framework operates on three layers:

Federal layer: FTC Section 5 enforcement. FTC retains authority under Section 5 to challenge specific non-compete agreements deemed "unfair methods of competition" on case-by-case basis. The FTC's Joint Labor Task Force established February 2025 targets unreasonable non-competes for enforcement.

State layer: State law governing enforceability. State frameworks vary substantially from outright prohibition (California, North Dakota, Oklahoma, Minnesota) to reasonableness-based enforcement in most states.

Contract layer: Reasonableness analysis. Even in states allowing non-competes, courts apply reasonableness analysis considering scope, duration, geography, legitimate business interest, and consideration.

This is how the current non-compete and non-solicitation framework actually works after the FTC rule's dismantling, the state law landscape governing enforceability, the FTC's case-by-case enforcement approach, the substantive analysis of different restrictive covenant types, and the strategic considerations for business owners structuring restrictive covenants.

The FTC's case-by-case enforcement approach

While the blanket ban was struck down, the FTC retains substantial enforcement authority:

Section 5 authority. Under 15 U.S.C. §45, the FTC can challenge "unfair methods of competition" — which can include unreasonable non-compete agreements.

Joint Labor Task Force (February 2025). FTC Chair Ferguson established the Joint Labor Task Force to prioritize:

Non-solicitation agreements
"No-poach" agreements between employers
Non-compete agreements
Other restrictive covenant enforcement
Healthcare sector focus

Healthcare sector emphasis. September 10, 2025 FTC announcement explicitly focused enforcement on healthcare industry:

Healthcare staffing firms
Hospital systems
Healthcare professional employers
Sent letters to multiple large employers requesting compliance review

Major enforcement actions:

Gateway Services consent order (September 2025 / finalized February 12, 2026). Pet cremation business with approximately 1,800 employees:

Imposed non-competes on nearly all employees
From executives to hourly workers
Typically prohibited industry employment for 1 year after leaving
Anywhere in U.S. geographic scope
10-year consent order requirements:
- Notify all employees agreements are unenforceable
- Cease enforcement of existing agreements
- Ongoing compliance reporting
- No new prohibited agreements

Adamas Amenity Services (December 2025). Building services contractor with broad non-compete program. Similar consent order framework.

Rollins, Inc. action (April 15, 2026). Pest control services company with 18,000+ employees:

Required vast majority of workforce to enter non-competes
2-year duration
75-mile geographic radius from work location
Applied to all newly-hired employees regardless of position
Including hourly and entry-level workers
FTC complaint alleged unfair methods of competition

Gateway consent order exceptions. The Gateway consent order signals FTC's view on legitimate non-competes:

Non-competes with directors and officers may be acceptable
Non-competes with senior employees receiving equity acceptable
Non-competes incident to business sale acceptable
Non-solicitation agreements not categorically prohibited
Confidential information and trade secrets covenants not prohibited

FTC factors signaling enforcement risk:

1. Blanket coverage of all employees. Including hourly, entry-level, and lower-level workers who don't possess confidential information or specialized skills.

2. Overly broad geographic scope. Nationwide or unlimited geography for positions that don't warrant such scope.

3. Unreasonable duration. Multi-year restrictions (2+ years) for non-executive positions.

4. Lack of legitimate business interest. Restrictions not tied to actual trade secrets, customer relationships, or specialized training.

5. Imposed on newly-hired employees regardless of position. One-size-fits-all imposition rather than tailored to specific role.

State law landscape: prohibition vs. enforcement

State frameworks vary dramatically:

Prohibition states

California (strictest framework). Cal. Bus. & Prof. Code §16600 prohibits most non-competes. Recent enhancements:

SB-699 (effective January 1, 2024). Cal. Bus. & Prof. Code §16600.5 provides:

Voids non-competes even when signed outside California
Cannot be enforced against employees who later work in California
Private right of action for employees
Injunctive relief, actual damages, attorney's fees recoverable

AB-1076 (effective January 1, 2024). Requires California employers to:

Notify current employees of void non-competes
Notify former employees employed after January 1, 2022
Written notice by February 14, 2024
Failure to notify = unfair competition

Edwards v. Arthur Andersen (2008). California Supreme Court held any non-compete falling outside statutory exceptions is void regardless of how narrowly tailored. AB-1076 codified this holding.

California exceptions (very limited):

Sale of business non-competes (§16601)
Partnership dissolution non-competes (§16602)
LLC dissolution non-competes (§16602.5)

North Dakota. N.D. Cent. Code §9-08-06 prohibits non-competes (very limited exceptions).

Oklahoma. Okla. Stat. tit. 15, §219A prohibits non-competes (similar limited exceptions).

Minnesota. Minn. Stat. §181.988 (effective July 1, 2023) prohibits new non-competes for most employees.

Strict regulation states

Colorado. Colo. Rev. Stat. §8-2-113 (effective August 2022):

Prohibits non-competes for non-highly compensated employees
Highly compensated = above specific threshold (adjusted annually, $112,500+ in 2024)
Requires advance notice
Limited duration and geographic scope requirements

Washington. RCW §49.62.030 (2020):

Income threshold (above $116,594 in 2024 for employees)
Higher threshold for independent contractors ($291,485 in 2024)
Maximum duration (typically 18 months)
Advance notice requirements
Garden leave during enforcement

Massachusetts. Massachusetts Noncompetition Agreement Act (effective October 1, 2018):

Maximum 12-month duration
Garden leave (50% of base salary) during enforcement
Reasonableness analysis required
Notice requirements

Illinois. Illinois Freedom to Work Act (amended 2022):

Income threshold ($75,000 in 2024)
14-day review period required
Other procedural protections

Reasonableness-analysis states

Most other states allow non-competes subject to reasonableness analysis:

Legitimate business interest required:

Trade secrets protection
Customer relationship protection
Specialized training investment
Confidential business information

Reasonable scope analysis:

Geographic scope reasonable to business interest
Duration reasonable (typically 6 months to 2 years for executives)
Activities restricted reasonable
Consideration adequate

State-specific variations:

Some states require additional consideration beyond employment
Some states have specific industry restrictions
Some states require advance notice
Some states have blue-pencil doctrine (court modifies overbroad restrictions)
Some states have red-pencil doctrine (court invalidates overbroad restrictions)

Multi-state employer issues

Choice of law and forum. Many employers include choice of law and forum provisions to ensure consistent governing law. The provisions don't always work:

DraftKings v. Hermalyn (1st Cir. 2024). Massachusetts executive moved to California to work for competitor:

Massachusetts non-compete provision included
Hermalyn argued California law should apply (California prohibits non-competes)
Massachusetts court enforced the non-compete despite California work
First Circuit upheld injunction

The DraftKings case illustrates the complexity. Multi-state employers may need to:

Maintain state-specific non-compete provisions
Address potential enforcement in multiple jurisdictions
Plan for employee mobility issues
Coordinate with LLC operating agreement provisions
Address asset protection planning when restrictive covenants are litigation-prone

Types of restrictive covenants

The framework addresses multiple types of restrictive covenants:

Non-compete agreements

Definition. Restrict former employees from working in competing businesses or industries for specified time after employment ends.

Common provisions:

Geographic scope (radius, state, region, nationwide)
Duration (months to years)
Activities restricted (industry, specific competitors, role types)
Garden leave provisions (paid during restriction)
Consideration provisions

FTC enforcement risk. Highest among restrictive covenants. Blanket non-competes covering all employees particularly at risk.

Non-solicitation agreements

Customer non-solicitation. Restrict former employees from soliciting former employer's customers.

Employee non-solicitation. Restrict former employees from recruiting former colleagues.

Why typically more enforceable than non-competes:

More narrowly tailored
Direct connection to legitimate business interest
Less restrictive of employee mobility
More widely accepted by courts

Reasonable scope:

Specific customers identified or accessed during employment
Specific colleagues with whom employee worked
Limited duration (typically 6-24 months)
Doesn't prevent working in industry

Non-disclosure agreements (NDAs)

Definition. Restrict use or disclosure of confidential business information.

Generally enforceable. Provided confidential information is legitimately confidential and properly protected.

Coverage:

Trade secrets
Customer lists
Pricing information
Strategic plans
Technical information
Other legitimately confidential information

Limitations:

Cannot restrict general industry knowledge
Cannot restrict legitimately public information
Cannot prevent employee from using general skills

No-poach agreements

Between employers. Restrict employers from recruiting each other's employees.

Generally illegal as antitrust violations. Department of Justice has pursued criminal antitrust enforcement against no-poach agreements between employers.

Notable cases:

DOJ antitrust prosecutions of healthcare no-poach
Adobe, Apple, Google, Intel, Intuit, Pixar 2010 case
Various subsequent prosecutions

Garden leave provisions

Definition. Paid period after employment notice during which employee cannot work for competitor.

Increasingly used as alternative to non-competes:

Employer pays during restriction
Less restrictive of total compensation
Often more enforceable than unpaid non-competes
Required in some states (Massachusetts) for certain non-competes

Strategic considerations for business owners

For business owners structuring restrictive covenants:

Don't use blanket non-competes for all employees. FTC enforcement actions consistently target blanket agreements covering hourly, entry-level, and non-executive employees. Limit non-competes to:

Senior executives
Employees with access to trade secrets
Employees with substantial customer relationships
Employees who received substantial specialized training

Tailor agreements to specific roles. Different employee categories warrant different restrictive covenants:

Executives: Full non-compete with garden leave
Sales: Non-solicitation focus
Technical: NDA and non-solicitation
Operations: NDA primarily

Use narrower restrictions when possible. Courts and FTC favor narrower restrictions:

Specific competitors rather than entire industry
Specific customers rather than all customers
Reasonable geographic scope tied to actual business
Reasonable duration tied to legitimate interests

Address state-specific requirements. Multi-state employers should:

Identify states where employees work
Apply state-specific requirements
Provide required notices
Use state-appropriate language
Plan for choice of law issues

Consider alternative protective measures:

Strong NDAs
Specific customer non-solicitation
IP assignment provisions
Confidentiality and trade secret protection
Employee retention through compensation
Garden leave provisions

Plan for enforcement complexity. Even enforceable restrictive covenants face enforcement challenges:

Litigation costs
Time to obtain injunction
Damages calculation difficulties
Forum selection complications
Multi-state enforcement issues

Use restrictive covenants in LLC operating agreements appropriately. Member-level restrictive covenants in operating agreements:

Generally more enforceable than employee non-competes
Connected to ownership interest
Sale of business framework typically applies
Different procedural requirements

Apply business sale exceptions strategically. Most state frameworks (including California) allow non-competes incident to business sale. Structure transactions to take advantage of business sale exceptions when applicable. Coordinate with buy-sell agreement structures.

Address phantom equity and profits interests. Non-competes incident to equity grants may be more enforceable than employment-based non-competes. Consider phantom equity and profits interests frameworks for executive retention.

Coordinate with employment classification. Independent contractor classification affects:

Whether restrictive covenants are enforceable
Which state law applies
Tax consequences
Procedural requirements

Plan for litigation costs. Restrictive covenant litigation is expensive:

Typically $50,000-$500,000+ for injunction proceedings
Multi-state enforcement multiplies costs
Employee litigation often pursued by employee on contingency
Plan financially for enforcement realistic costs

Address tax implications. Restrictive covenant payments may be:

Ordinary income to recipient
Deductible business expense to payor
Capital gain in some structures
Garden leave creates ongoing employment relationship affecting reasonable compensation analysis

Watch for healthcare-specific issues. Healthcare employers face:

Substantial state-specific restrictions on physician non-competes
FTC enforcement focus
Public policy concerns about patient care continuity
Professional regulatory restrictions

Address employee mobility planning. When employees subject to non-competes consider leaving:

Review specific agreement language
Identify state law that applies
Evaluate enforcement risk
Consider negotiated release
Plan for litigation possibility

Coordinate with FTC enforcement risk assessment. Assess your restrictive covenants against FTC enforcement criteria:

Blanket coverage red flag
Coverage of lower-level workers red flag
Overly broad scope red flag
Lack of legitimate business interest red flag

If your program triggers these factors, consider proactive modification before FTC enforcement.

Use the Gateway consent order as guidance. The Gateway consent order details what FTC considers acceptable:

Director and officer non-competes (with equity)
Senior employee non-competes (with equity)
Business sale non-competes
Non-solicitation agreements
Confidentiality and trade secret covenants

Plan for the regulatory landscape evolution. The non-compete regulatory landscape continues evolving:

More state legislation expected
Continued FTC enforcement
Potential Supreme Court review of related issues
Industry-specific developments

Engage qualified employment counsel. Restrictive covenants are too important for non-specialist drafting:

State-specific requirements
FTC enforcement risk assessment
Litigation strategy
Multi-state coordination

Coordinate with business succession planning. Restrictive covenants affect:

Business sale value
Succession planning options
Owner exit strategies
Employee retention through transitions

For business owners structuring or evaluating restrictive covenants in the current post-FTC-rule framework, the landscape is complex but manageable. The combination of state-specific legal frameworks, FTC case-by-case enforcement, evolving best practices, and continuing state legislative activity creates a dynamic regulatory environment. The work for business owners is in tailoring agreements to specific roles and legitimate business interests, addressing state-specific requirements for multi-state workforces, avoiding the blanket-coverage pattern that triggers FTC enforcement, considering alternative protective measures including narrower non-solicitation and NDA frameworks, and engaging qualified employment counsel for specific drafting and enforcement decisions. For business owners who do this work thoughtfully, restrictive covenants can provide meaningful protection of legitimate business interests while avoiding the FTC enforcement risks and state-law challenges that face blanket restrictive covenant programs. The framework's evolution between 2024 and 2026 — from federal blanket ban to case-by-case enforcement — reflects the inherent tension between protecting employer legitimate interests and protecting employee mobility, and the resulting framework requires more sophisticated planning than the simpler approaches that worked before the regulatory attention of recent years.