- The Federal Trade Commission Rule effective September 4, 2024, attempting to strike down most covenants not to compete has been invalidated by the Courts.
- However, noncompete clauses are still subject to restrictions under State laws. Laws governing Covenants Not to Compete vary between States, however, here are typical State Law requirements:
- First, the covenant must either be included in a legally enforceable contract, such as an employment agreement or agreement for sale of a business, or be a legally enforceable contract itself.
- Second, the covenant must comply with specific restrictions under applicable state law.
- A covenant not to compete is a restraint on trade. Most courts are reluctant to enforce restraints on trade – including Covenants Not to Compete.
- Many states have specific laws defining what restrictions are valid in an enforceable Covenant Not To Compete.
- Typically:
- The party seeking to enforce the covenant must prove a legitimate business interest that is worth protecting.
- The duration of the restricted period must be reasonable; not too long.
- The territory and scope of the restriction must be reasonable; not overbroad.
- A Covenant Not To Compete that limits an individual’s freedom to engage in his or her profession or usual line of work will likely not be enforceable if the duration is more than a year – often even less than a year.
- A Covenant Not To Compete entered into in connection with the sale of a business will generally be enforceable for a longer time – sometimes as much as 3 to 5 years – to protect the goodwill value of the purchased business.
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