2024 was quite a year in unfair competition and trade secrets law, with the Federal Trade Commission’s final rule on non-competes garnering widespread mainstream media attention. While the FTC final rule has been set aside pending appeal, employers’ use of restrictive covenant agreements continues to be scrutinized by the National Labor Relations Board and constrained by multiple state legislatures. Conversely, courts in Georgia and Delaware made life easier for employers seeking to utilize employee non-solicit and forfeiture for competition provisions, respectively. This article recaps the top regulatory, legislative, and judicial developments in 2024 and what employers need to know to be ready for 2025.

Federal Regulatory Activity

The Twists and Turns of the FTC Final Rule

On April 23, 2024, the FTC approved by a 3-2 vote its final rule that would have effectively banned employers’ use of non-compete agreements, with very limited exceptions. The expansive language of the rule and the FTC’s comments to it would have encompassed not only explicit non-compete covenants, but also certain agreements, such as non-solicit or non-disclosure agreements. Moreover, the ban would have applied retroactively. The final rule faced several immediate legal challenges in federal district courts in Texas, Pennsylvania, and Florida, with varying outcomes. On July 3, 2024, the Northern District of Texas in Ryan, LLC v. FTC issued a limited stay and preliminary injunction of the final rule that applied only to the plaintiffs in that action. On July 23, 2024, the Eastern District of Pennsylvania in ATS Tree Services, LLC v. FTC declined to block the final rule, denying the plaintiff’s motion for preliminary injunction.  Similar to the Texas court, the Middle District of Florida in Properties of the Villages, Inc. v. FTC issued a preliminary injunction limited to the plaintiff in that case on August 14, 2024. The FTC’s appeal is pending before the Eleventh Circuit.  

Finally, to the relief of many employers scrambling to prepare for the final rule’s rapidly approaching effective date, the Northern District of Texas on August 20, 2024, granted the Ryan LLC plaintiffs’ motion for summary judgment and set aside the final rule on a nationwide basis. 

While not certain, with the new administration taking office this month, we expect the FTC’s pursuit of continued litigation on the rule to lose steam, rendering it rule effectively dead. Although the final rule is now highly unlikely to ever take effect, the FTC’s action did have one clear impact: it brought the use of non-compete and similar provisions into the foreground and will likely trigger continued legislative action at the state level, in turn expanding the patchwork of rules and restrictions covering post-employment covenants between employers and workers.

NLRB General Counsel Expands Unprecedented Foray into Non-Compete Agreements

On the heels of last year’s Memorandum 23-08, setting forth her view that employers’ use of most non-compete agreements violates the National Labor Relations Act, NLRB General Counsel Jennifer A. Abruzzo doubled down on her challenge to such agreements by issuing Memorandum 25-01 on October 7, 2024. 

First, GC Abruzzo urges the NLRB to provide make-whole relief to employees subject to non-compete provisions that are found to violate the NLRA. Contrary to the NLRB’s longstanding practice of ordering rescission of unlawful workplace rules or contract terms to remedy unfair labor practices, in Memorandum 25-01, GC Abruzzo asserts that make-whole relief is necessary to remedy illegal non-competes because non-compete provisions have reduced employee wages and benefits by restricting job opportunities. Further, GC Abruzzo recommends that the Board amend its standard notice in several ways to notify and alert current and former employees that they may be entitled to a differential (in terms of wages or benefits) if they were discouraged from pursuing or unable to accept job opportunities due to the non-compete provision. Of particular consequence, in footnote 5, the GC urges the Board to order that an employer dismiss, and pay the legal fees and costs incurred by an employee to defend against, any legal action to enforce what the GC determines to be an unlawful non-compete.

Second, Memorandum 25-01 sets forth a framework for analyzing “stay or pay” provisions, generally referring to contracts under which an employee must pay the employer if the employee separates from employment, voluntarily or involuntarily, within a certain timeframe. These include training repayment agreements, educational repayment contracts, quit fees, damages clauses, sign-on bonuses, and other types of cash payment tied to a mandatory stay period. GC Abruzzo states her view that such “stay or pay” provisions are presumptively unlawful, which presumption may only be rebutted if four factors are satisfied: (1) the agreement is voluntarily entered into in exchange for a benefit; (2) it has a reasonable and specific repayment amount; (3) it has a reasonable “stay” period; and (4) it does not require repayment if the employee is terminated without cause.

Finally, GC Abruzzo recommends two types of remedies, depending on the voluntariness of the provision. If voluntary but not narrowly tailored according to her four-part test, the GC recommends replacement of problematic aspects of the agreement with lawful provisions. However, for non-voluntary agreements, the GC recommends rescission and a requirement the employer notify employees that the stay obligation is eliminated and the debt is forgiven. The GC also recommends amending the Board’s notice language and the make-whole relief akin to what GC Memo 25-01 urges for allegedly unlawful non-competes.

Importantly, the Board has not yet ruled on the lawfulness of non-compete and non-solicitation agreements and other NLRB activity to date has been a mixed bag. In December 2023, the Division of Advice issued a memorandum analyzing a company’s employment agreement and concluded that several key provisions – including non-solicitation, non-disclosure, and return of property clauses – were not unlawful and that a lawsuit filed to enforce them did not violate the NLRA. Meanwhile, a January 2024 settlement to a complaint brought by Region 9 and a June 2024 administrative law judge decision involving complaints filed by NLRB field offices have bolstered the position of the GC.

GC Abruzzo’s positions on these issues did not make it into Board law prior to the end of the Biden administration. It is almost certain that the Trump administration will replace Ms. Abruzzo as general counsel immediately. Further, former Chair and Democratic Member Lauren McFerran was not confirmed for a second term, leaving a second vacant seat on the NLRB that the Trump administration is expected to fill quickly to shift the Board majority. It is unlikely that a Republican-majority Board will agree with Abruzzo on any of the pending cases before them presenting her view that non-competes and other restrictive covenants violate Section 7.  While the Trump administration may seek some balance between Trump’s election appeals to organized labor with his pro-business mindset, we predict that these challenges to non-competes and other restrictive covenants seen during the Biden administration will not continue into 2025.

State Law Legislative Updates

Washington State Expands and Clarifies its Non-Compete Statute

On June 6, 2024, amendments to Washington’s non-compete statute (RCW 49.62) went into effect, expanding the already significant restrictions it places on employers doing business in the state. The amendments are intended to address and clarify certain provisions of the law that the state legislature believes courts have misconstrued or misinterpreted. The amendments, among other things:

• Expand the Definition of “Noncompetition Covenant”:  The amendments expand the definition of “noncompetition covenant” in RCW 49.62.010(4) to include agreements that prohibit a former employee or independent contractor from accepting or transacting business with a customer. This amendment responds to judicial decisions finding nonacceptance of business clauses to be non-solicitation covenants, and thus, excluded from the strict enforceability requirements of RCW 49.62. 

• Limit the Sale-of-Business Carveout: The purchase or sale of business exclusion now applies only to transactions involving 1% or more of the business. This new 1% requirement narrows the sale-of-business exclusion in RCW 49.62.010(4) to prevent employers from claiming it applies to “non-competition covenants” contained in many employees’ equity grant agreements.

• Limit the Non-Solicitation Carveout to Current Customers: The amendments narrow the definition of a “nonsolicitation agreement” to apply only to covenants that prohibit the solicitation of “current” customers of the employer.

• Clarify the Timing of the Prior Notice Requirement:  RCW 49.62.020(1)(a)(i) requires employers to disclose the terms of the “noncompetition covenant” in writing to prospective employees no later than the time the employee accepts an offer of employment, or else the covenant is void and unenforceable.  In response to a court ruling that an initial verbal acceptance of a job offer did not trigger the notice requirement, this provision was amended to clarify that notice of the covenant must be provided no later than the “initial verbal or written acceptance” of employment. This means that the covenant must be provided prior to any verbal offer of employment, which may often occur prior to an official offer letter.

• Clarify Washington Venue and Choice-of-Law Provisions: The amendments to RCW 49.62.050 render “void and unenforceable” any contract provisions in a noncompetition covenant signed by a “Washington-based” employee or independent contractor if (1) the choice-of-venue provision requires adjudication outside of Washington; (2) deprives the employee the protections or benefits of the statute; or (3) “allows or requires the application of choice of law principles or the substantive law of any jurisdiction other than Washington state.” This change is directed at courts that have required Washington-based employees to litigate outside of Washington and have applied non-Washington law based on the prior wording of Section 49.62.050. Notably, the statute does not define “Washington-based,” although, in deciding choice-of-law issues, Washington courts focus on the location of the employee’s work site and residence as principal guiding factors.

• Expand Retroactive Application:  The original RCW 49.62.080(4) limited the statute’s intended retroactive effect by prohibiting declaratory actions regarding a noncompetition covenant signed prior to January 1, 2020 “if the noncompetition covenant is not being enforced.” Recognizing that some employers may take other actions short of litigation (like demand letters) to give effect to the noncompetition covenant, RCW 49.62.080(4) was amended to permit declaratory actions based on pre-January 1, 2020, covenants if they are being “explicitly leveraged.” What it means to “explicitly leverage” something is unclear and will almost certainly be fuel for future litigation.

• Expand Who May Bring a Private Right of Action to Challenge a Noncompetition Covenant: RCW 49.42.080(1) previously provided that only a party to a non-competition covenant could bring a cause of action challenging the covenant. This section was amended to remove that limitation, and provides that any “person aggrieved by a noncompetition covenant” may bring a cause of action. Whether this will be interpreted to include an employee’s new employer, or some other party impacted more indirectly by an agreement waits to be seen.

Employers with Washington-based employees should review their existing noncompetition and non-solicit covenants to ensure compliance with these recent amendments including review of any protocol and standardized communications used with exiting employees to help guard against inadvertently creating communications that could be viewed as “explicitly leverag[ing]” pre-January 1, 2020, covenants that now run afoul of the statute. Employers should consult with experienced employment counsel when drafting or proposing noncompetition agreements for Washington-based workers and prior to sending out demand letters or taking other steps to enforce such covenants against former employees or independent contractors. Employers should also review, and if needed revise, their job offer processes to ensure that new employees receive timely notice of any noncompetition covenant, and train managers and supervisors accordingly.

States Continue Limiting Restrictive Covenants in Healthcare

Within the last year, five more states enacted laws adding new limitations to the use of restrictive covenants with certain healthcare workers, with one state modifying the penalties associated with violations of previously enacted limitations. Some of these changes are very specific and apply to a small subset of healthcare providers (e.g., Illinois), while others are broad and apply to almost all healthcare providers in a state (e.g., Pennsylvania). These changes, which are summarized below, further warrant employers’ taking a state-specific approach to drafting and enforcing restrictive covenant agreements, particularly in the healthcare setting.

• Illinois. On August 9, 2024, Illinois passed SB 2737, which amends the Illinois Freedom to Work Act to render any non-compete or non-solicit agreement entered into on or after January 1, 2022 unenforceable with respect to the provision of mental health services to veterans or first responders by licensed mental health professionals, but only if any such restrictive covenant is likely to increase the cost of or difficulty in seeking such services. The amendment, which went into effect January 1, 2025, does not provide guidance on determining when a restrictive covenant increases the cost or difficulty in seeking mental health services. Accordingly, application of this prohibition will likely be fact intensive, and employers may be uncertain as to its application in advance of any enforcement efforts.

• Iowa. On May 9, 2024, Iowa amended its healthcare employment agency law to remove certain penalties for healthcare employment agencies that violate the state’s prohibition on both non-compete provisions and termination-of-employment penalties in any contract with an agency worker or healthcare entity. The original law included significant penalties on a healthcare employment agency that incorporated prohibited provisions in its agreements with agency workers or other healthcare entities, including the potential loss of the agency’s registration to do business and fines. The law took effect upon enactment.

• Louisiana. On May 28, 2024, Louisiana amended its restrictive covenant law to require physician non-compete agreements to sunset after a three- or five-year period and mandates specific temporal and geographic restrictions on non-compete agreements for physicians. The statute places a three-year sunset period from the date of the applicable agreement on any non-compete agreement for “primary care physicians,” as defined in the statute, and a five-year sunset period on all other physician non-compete agreements. Any subsequent agreement between the employer and the physician cannot include any non-compete provisions. In addition, the non-compete restrictions shall only apply in the parish where the physician’s principal practice is located and no more than two contiguous parishes where the employer “carries on a like business.” The parishes shall be specified in the agreement, and the non-compete agreement shall not exceed two years from termination of employment. Physicians employed by rural hospitals or federally qualified healthcare centers in rural parishes (as defined in the statue) are excluded from the law. The statute took effect on January 1, 2025, and for covered non-compete agreements already in place, the application three- or five-year sunset period will commence on the effective date of the statute.

• Maryland. On April 25, 2024, Maryland enacted new legislation prohibiting non-compete and conflict-of-interest clauses for certain healthcare professionals and veterinarians. In particular, the legislation expands the limitations of non-compete agreements found in Maryland Code Section 3-716 to prohibit non-compete agreements for individuals who are either: (a) healthcare providers licensed under Maryland’s Health Occupations Article (e.g., physicians, physician assistants, nurse practitioners, nurses, dentists, pharmacists, psychologists, optometrists, etc.) who provide direct patient care and earn equal to or less than $350,000 in total annual compensation; or (b) licensed as a veterinary practitioner or veterinary technician.

For covered healthcare providers earning more than $350,000, the law limits the maximum allowable time of non-competes and conflict-of-interest provisions to one year from the last day of employment, and any such provision may not restrict the provider from working in a geographic region greater than 10 miles from their primary place of employment. In addition, employers must provide notice to these higher-earning providers’ patients, if asked, as to their new location. The law became effective for covered veterinary practitioners and technicians on June 1, 2024, and becomes effective for covered healthcare providers on July 1, 2025.

• Pennsylvania. On July 23, 2024, Pennsylvania enacted the Fair Contracting for Health Care Practitioners Act, which effectively bans non-compete covenants and patient non-solicitation provisions between an employer and “health care practitioners” that are longer than one year or where the practitioner was “dismissed by the employer.” Therefore, covenants may remain enforceable if (1) the covenant lasts no more than one year and (2) the practitioner voluntarily separates from the employer. The Act defines “employer” broadly as “a person or group of persons that employ a health care practitioner at a health care facility or office.” The definition of “health care practitioner” covers medical doctors, doctors of osteopathy, certified registered nurse anesthetists, certified registered nurse practitioners, and physician assistants. The Act is limited in two notable respects. First, the Act does not prohibit an employer from enforcing a contract provision that allows an employer to recover from a practitioner’s reasonable expenses related to “relocations, training, and the establishment of a patient base” if the expenses are directly attributable to the practitioner, accrued within three years before a separation (other than dismissal), and amortized over a period of up to five years from the date of separation. Second, the Act does not apply to covenants entered into with a practitioner with an interest in a business entity where the covenant results from (1) the sale of an ownership interest or all or substantially all of the assets of the business entity; (2) transactions resulting in the sale, transfer, or change in control of the business entity; or (3) the health care practitioner’s receipt of an ownership interest in the business entity. The Act went into effect January 1, 2025.

• Rhode Island. As of June 14, 2024, Rhode Island added to its wage-based prohibitions on non-competes to effectively ban non-compete agreements with advance practice registered nurses in employment agreements, partnership contracts, or “any other form of professional relationship.” The law applies to any restriction on the right to practice, including without limitations, the right to practice in a geographic area for any period of time following the termination of the partnership or professional relationship, the right to provide treatment to any current patient of the employer, and the right to solicit current patients of the employer. However, the law does not apply to covenants in connection with the purchase or sale of a practice, provided such covenant is for a period of no more than five years. The law took effect immediately, and it does not affect the remaining provision of any such contract or agreement.

Notable Judicial Decisions

Georgia Supreme Court Holds Restrictive Covenants Act Does Not Require That Restrictive Covenants Contain Express Geographic Restriction to Be Enforceable

We previously reviewed the Georgia Court of Appeals decision in North American Senior Benefits, LLC v. Wimmer, 319 Ga. 641 (2024), which held that an employee non-solicitation covenant must contain an express geographic limitation to be enforceable. Earlier this year, the Georgia Supreme Court unanimously reversed the Georgia Court of Appeals’ decision and held that the Georgia Restrictive Covenants Act (GRCA) does not require that an employee non-solicit agreement contain an explicit geographic limitation to be considered reasonable in geographic scope.

In doing so, the court found that “nothing in the text of [the GRCA] mandates that a restrictive covenant contain an explicit geographic term, nor does [it] prohibit a covenant’s geographic area from being expressed in implied terms.” The court reasoned that the GRCA’s underlying purpose was a “more permissive and flexible approach to restrictive covenants.”

The Georgia Supreme Court remanded the case to the trial court to determine whether the employee non-solicitation covenant at issue in Wimmer is reasonable in geographic scope under the totality of circumstances, including, but not limited to, the total geographic area encompassed by the provision, the business interests justifying the restrictive covenants, the nature of the business involved, and the time and scope limitations of the covenant. See OCGA § 13-8-55.

Notably for employers, while the case involved an employee non-solicitation covenant, the reasoning appears to apply to other restrictive covenants, including non-competition agreements. Nonetheless, employers should consider inclusion of geographic restrictions in their employee non-solicitation and non-competition covenants, as this may maximize the chances that a Georgia court finds that such covenants are found reasonable.

Delaware Supreme Court Endorses and Reaffirms a Less-Stringent Review of “Forfeiture for Competition” Provisions

On January 29, 2024, the Delaware Supreme Court unanimously reversed a major Delaware Chancery Court decision in Cantor Fitzgerald L.P. v. Brad Ainslie that had analyzed “forfeiture for competition” provisions in a limited partnership agreement using a traditional restrictive covenant reasonableness standard. The court held that under Delaware law, non-competition and similar restrictive covenants requiring the forfeiture or repayment of benefits for violations are not subject to the same strict “rule of reason” analysis attendant to typical post-employment covenants (which seek to enjoin the activities proscribed).

In Cantor Fitzgerald L.P., six partners voluntarily executed limited partnership agreements that included forfeiture-for-competition provisions. Although these contractual provisions did not prohibit competition in the event the partners left the partnership, the provisions did offer the withdrawing partners a choice in the event they voluntarily withdrew from the partnership: (a) they could choose to compete against that partnership after their departure and relinquish their rights to significant financial benefits, or (b) they could abstain from competing with the partnership for one year and receive those contingent financial benefits. The Delaware Supreme Court emphasized that the freedom to contract takes a front seat when the post-employment restraint gives the contracting individual a choice and does not actually restrain their business endeavors: Take the financial benefit and adhere to the restrictive terms, or violate them and forfeit the money. Thus, the court held such provisions should be honored and enforced, save the applicability of standard contract defenses (like duress, unconscionability, lack of consideration, and fraud).

Further clarity concerning the scope of the Cantor Fitzgerald decision came at the end of 2024. On December 17, 2024, responding to two questions certified by the Seventh Circuit in LKQ v. Rutledge, 96 F. 4th 977 (7th Cir. 2024), the Delaware Supreme clarified that:

• Cantor Fitzgerald’s holding that forfeiture-for-competition provisions are not subject to the more exacting “rule of reason” analysis attendant to standard post-employment restrictions applies irrespective of whether those provisions are found in an agreement between a partner and a partnership or in agreements between an employer and an employee.

• The “Employee Choice Doctrine” instead governs, meaning that forfeiture-for-competition provisions receive treatment similar to any other standard contractual term in the employment relationship context, subject only to regular contract-based defenses. 

• Delaware’s application of the “Employee Choice” analysis to forfeiture-for-competition provisions is not necessarily dependent upon the relative sophistication of the contracting employee or businessperson, nor is it necessarily dependent upon whether the restrictive covenant agreement in question includes other terms that may also seek to enjoin the contracting party from affirmatively engaging in competitive business activities. 

• The “Employee Choice Doctrine” may apply irrespective of whether the agreement in question concerns the forfeiture of benefits (typically, equity) to be received by an employee in the future or the return of benefits already received.

These two related decisions are particularly important given Delaware’s prime place within the business community and the number of equity agreements that include Delaware choice-of-law and/or forum selection provisions. It is also notable, given the many recent decisions issued by Delaware courts over the last few years that have taken an increasingly strict view on the permissible scope of “typical” post-employment restrictive covenants.

Upcoming Webinar

For more in-depth discussion of what employers need to know in the new year and reflection on early developments from the new administration, please keep an eye out for Littler’s upcoming Restrictive Covenants and Trade Secrets: What to Expect in 2025 webinar.  Details on the complimentary webinar will be posted on Littler’s Events page