Non-Compete Clause FAQ

It depends entirely on where you are. Non-compete enforceability varies dramatically by state:

• Some states ban them entirely (California, North Dakota, Oklahoma, Minnesota)
• Some states heavily restrict them (Colorado, Oregon, Washington, Illinois, Maine)
• Most states enforce them if they meet reasonableness requirements

Even in enforcement-friendly states, courts apply "reasonableness" tests examining duration, geographic scope, and business necessity. Overly broad non-competes are often narrowed or struck down.

California has the strongest anti-non-compete stance in the nation. Under Business and Professions Code Section 16600:

• Non-compete agreements are void except in limited sale-of-business contexts
• This applies to employees, contractors, and business partners
• Choice of law provisions don't help - California courts ignore them when California employees or residents are involved
• The ban has been strengthened - recent legislation prohibits even asking employees to sign non-competes

What still works in California:

• Confidentiality agreements (protecting trade secrets)
• Non-solicitation of customers (with limitations)
• Non-solicitation of employees (in NDA context, not employment)
• Assignment of inventions clauses

Here's a simplified overview of key state positions:

State	Status	Key Notes
California	Void	Almost never enforceable
North Dakota	Void	Similar to California
Oklahoma	Void	Narrow sale-of-business exception
Minnesota	Void	Banned as of July 2023
Colorado	Limited	Only for highly-compensated workers; criminal penalty for violations
Washington	Limited	Income thresholds apply; limited duration
Oregon	Limited	18-month max; income requirements
Illinois	Limited	Income threshold; "adequate consideration" required
Texas	Enforceable	Must be reasonable; "blue pencil" doctrine
Florida	Enforceable	Presumption of validity; employer-friendly
New York	Enforceable	Reasonableness test; recent reform efforts pending

Important: Laws change frequently. Always check current state law, especially as many states are actively considering non-compete reform.

The FTC issued a final rule in 2024 that would ban most non-compete agreements nationwide. However, as of now:

• The rule has been challenged in federal courts
• A Texas federal court has blocked nationwide implementation
• The legal outcome remains uncertain pending appeals

What this means for you:

• State law still governs in most cases currently
• Avoid relying solely on non-compete clauses for protection
• Use strong confidentiality provisions as a backup
• Monitor developments - the landscape may change

Duration limits vary by state, but courts generally view these timeframes as follows:

• 6 months to 1 year: Almost always considered reasonable
• 1-2 years: Usually acceptable if other terms are reasonable
• 2-3 years: Faces increasing scrutiny; may require strong justification
• 3+ years: Frequently struck down or reduced as unreasonable

Some states have statutory caps:

• Oregon: 18 months maximum
• Washington: 18 months maximum
• Colorado: 14 months maximum for certain workers

Even without statutory limits, courts use "reasonableness" analysis. Longer restrictions require stronger justification (e.g., protection of highly sensitive trade secrets).

Geographic scope must be reasonable and tied to legitimate business interests. Courts examine:

• Where does the business actually operate? Restricting competition in areas where you don't do business is overreaching
• What's the relevant market? For local businesses, statewide restrictions may be excessive; for national companies, broader scope may be justified
• Is it proportional to the role? Restrictions should match the geographic scope of the business relationship

For online/global businesses: Geographic restrictions are harder to apply. Courts may focus on specific customer lists, market segments, or product categories instead of geography.

Industry-wide restrictions face serious enforceability problems. Courts generally require that non-competes be narrowly tailored to protect specific, legitimate interests - not to eliminate all competition.

More likely enforceable:

• Restrictions on competing with specific products or services discussed under the NDA
• Restrictions limited to markets where confidential information is relevant
• Restrictions on using specific confidential information to compete

Less likely enforceable:

• "You cannot work in the software industry"
• "You cannot compete in any business similar to ours"
• Blanket bans without connection to disclosed information

If a court finds a non-compete unenforceable, several outcomes are possible:

• The clause is void: In states like California, the entire non-compete simply has no effect
• "Blue pencil" doctrine: Some states allow courts to modify (rather than void) unreasonable terms - reducing duration, narrowing scope, etc.
• Severability: If your NDA has a severability clause, the invalid non-compete may be removed while the rest of the NDA remains in effect

The catch: Even unenforceable non-competes can have a "chilling effect." You might avoid legitimate business activities out of fear of litigation, even if you'd ultimately win. The other party might also sue you to slow you down, creating legal costs and business disruption.

Absolutely, and you should try. Non-compete clauses are often the most negotiable part of an NDA because:

• Many lawyers and business people know they're controversial and often unenforceable
• Strong confidentiality provisions can protect most legitimate interests without non-competes
• The other party may have included it as an aggressive starting position

Negotiation approaches:

• Remove it entirely: Argue that robust confidentiality protections are sufficient
• Narrow the scope: Limit to specific products/services related to the disclosed information
• Shorten the duration: Push for 6-12 months instead of 2-3 years
• Add exceptions: Carve out your existing business lines, ongoing projects, or general skills
• Make it mutual: If they insist on restricting you, the same restrictions should apply to them

There are important distinctions:

NDA Non-Competes (Business to Business):

• Between companies or business entities, not individual employees
• Usually related to protecting disclosed confidential information
• May be viewed more favorably by courts because businesses have more equal bargaining power
• Still subject to reasonableness requirements

Employment Non-Competes:

• Restrict an individual's right to work
• Face greater scrutiny due to public policy concerns about employee mobility
• Subject to many state-specific restrictions and bans
• Often require additional consideration beyond employment

Several alternatives can protect legitimate interests without the enforceability problems of non-competes:

• Strong confidentiality provisions: Protect specific information rather than restricting all competition
• Non-solicitation of customers: Prevent targeting specific customers you learned about through the NDA relationship
• Non-solicitation of employees: Protect against poaching talent (subject to state limitations)
• Purpose limitation clauses: Restrict use of confidential information to specified purposes only
• No-license provisions: Clarify that no rights to intellectual property are transferred
• Garden leave provisions: Pay for a period of non-competition (more common in employment contexts)

These alternatives are generally more enforceable because they target specific harms rather than broadly restricting competition.

Non-competes in NDAs make most sense when:

• You're sharing truly sensitive competitive information: Not just general business info, but specific strategies, customer data, or trade secrets that could immediately advantage a competitor
• The receiving party could easily become a competitor: They have the capability and resources to enter your market
• Confidentiality alone isn't sufficient protection: Even without disclosing your secrets, the receiving party could use general knowledge gained to compete
• The receiving party is in an adjacent industry: They might pivot into direct competition

When to skip it:

• The receiving party is already a competitor (they won't sign it)
• You're in a state where non-competes are void (California, etc.)
• The information being shared isn't competitively sensitive
• Strong confidentiality provisions adequately protect your interests

Whether to refuse depends on several factors:

Consider refusing if:

• The non-compete covers your existing business lines
• The scope is overly broad (entire industry, worldwide, multi-year)
• You're in a state where it's likely unenforceable anyway (why accept the chilling effect?)
• The opportunity isn't worth the restriction

Consider negotiating instead if:

• The scope can be narrowed to something reasonable
• The opportunity is valuable enough to accept limited restrictions
• You have no plans to compete in the specific area covered
• The duration is short (6-12 months)