Non-Compete Round Up- FTC, NLRB, California and Delaware

As we approach the end of the first quarter in 2025, we have seen notable developments in non-compete law over the last 12 months. As the new administration decides what to do with non-competes at the federal level, state courts continue to make decisions that affect enforceability in jurisdictions across the country. At the federal level, the non-compete ban remains enjoined and—particularly in light of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), which officially ended the doctrine of Chevron deference—has likely been consigned to defeat. While the new administration does not seem to support a complete non-compete ban, the FTC’s new chair recently released a memo listing non-competes as “notable examples of conduct” that fall within the FTC’s jurisdiction.

At the state level, courts continue to shape the law of non-competes in important jurisdictions. While the full reach of California’s recent non-compete amendments continues to be uncertain, two decisions this last year, in Massachusetts and California, provide some guidance for stakeholders. In both cases, the courts declined to apply California’s non-compete ban to employees who had some ties to but worked outside of California, even though, in one case, the employee had relocated to California after his employment ended. Another court in California, meanwhile, clarified the state’s sale-of-business exception, holding that non-competes arising out of partial sales of an owner’s interest should be subject to a reasonableness review, while non-competes arising out of an owner’s sale of its entire interest could still be invalid if the sale does not include any goodwill. And while non-competes in Delaware continue to face increasing scrutiny in Delaware courts, the Delaware Supreme Court has made clear that forfeiture-for-competition provisions should generally be exempt from such scrutiny and instead are generally enforceable regardless of reasonableness.

Below we survey recent updates on the FTC’s approach to restrictive covenants, the NLRB’s guidance on non-compete agreements, California case law addressing the non-compete statute’s recent amendments and longstanding exceptions, and Delaware’s treatment of forfeiture-for-competition provisions.

FTC UPDATE

The FTC’s proposed rule prohibiting most non-compete agreements remains enjoined following the federal court’s decision in August 2024. In Ryan, LLC v. FTC, No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024), the U.S. District Court of Northern Texas granted summary judgment to the plaintiffs, ruling that the FTC exceeded its authority in attempting to implement a sweeping ban on non-compete clauses across industries. Although it appealed the decision, the FTC remains enjoined from enforcing the rule, which was originally set to take effect in September 2024.

With new presidential administration and change in FTC leadership, the ultimate fate of the FTC’s non-compete ban remains uncertain. But it seems unlikely that this new administration will throw its weight behind a complete non-compete ban at the federal level. The newly appointed FTC chair, Andrew Ferguson, previously opposed the rule, arguing that the FTC does not have the authority to issue a per se rule of great “economic and political significance,” such as a total ban of non-competes, without being granted the authority by Congress to do so. And at a conference in early February 2025, Ferguson (a) reiterated his opposition to the FTC’s categorical ban, describing it as a “blunderbuss” approach where a “scalpel” was probably required and (b) stated that the FTC should reconsider its defense of the rule. Ryan v. FTC, Docket No. 24-10951 (5th Cir. Oct 24, 2024), ECF 147 (“My view is that the Commission . . . basically needs to decide whether it’s a good idea [and] it’s in the public interest to continue defending this rule. . . . I’m going to be presenting at some point” to “my colleagues the decision about whether to continue defending this Rule.”); The Harvard Salient, FTC Chairman Andrew Ferguson & Harvard Law Professor Adrian Vermueule: CORE Conference 2025.

That is not to say the new administration will take no action against non-competes. At the same conference, Ferguson made clear that he intends to bring Section 1 enforcement actions where “the evidence shows” that the non-compete actually diminishes competition. And on February 26, 2025, Ferguson issued a memorandum announcing the formation of the FTC’s Labor Task Force, which will prioritize the investigation and prosecution of deceptive labor practices and unfair methods of competition. Specifically, the memorandum identified non-solicitation, “no-poach,” and non-competition agreements as examples of conduct that falls under the FTC’s jurisdiction. But the directive did not indicate that the administration favored an outright ban of such non-competes. Instead, it directed the Task Force—comprising FTC’s Bureau of Consumer Protection, Bureau of Economics, and Office of Policy Planning—to focus on investigative efforts and enforcement actions against companies engaging in potentially unlawful labor market restrictions.

In the meantime, the FTC moved for, and the court granted, a 120-day stay of the appeal in Ryan v. FTC, Docket No. 24-10951 (5th Cir. Oct 24, 2024), ECF 147, 148, to give the FTC time to consider whether to continue its defense of the non-compete ban.

NLRB GUIDANCE

On February 14, 2025, Acting General Counsel William B. Cowen of the National Labor Relations Board (NLRB) issued Memorandum GC 25-05, rescinding two key policy directives on non-compete agreements from the previous administration. The memo rescinded GC 23-08, which had asserted that most non-compete agreements violate the National Labor Relations Act (NLRA). It also rescinded GC 25-01, which deemed “stay or pay” provisions—requiring employees to pay their employer if they left within a certain period—unlawful under the NLRA.

CALIFORNIA

Some Guidance on Extraterritoriality

Last year’s amendment to California’s non-compete law raised questions around extraterritoriality, particularly in cases where employees relocate to California after signing non-compete agreements elsewhere. As we previously reported, effective January 1, 2024, California amended its non-compete statute (Business & Professions Code 16600), adding the following language that raised a potential question of what extent, if any, does California’s ban apply to employees who work outside of California: “An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.” Cal. Bus. & Prof. Code § 16600.5(b). Though this question has not yet been settled, two recent “race to the courthouse” cases, DraftKings and Poer, may be instructive.

In DraftKings Inc. v. Hermalyn, 732 F. Supp. 3d 84 (D. Mass.), aff’d, 118 F.4th 416 (1st Cir. 2024), a former DraftKings executive (Hermalyn), who was subject to a non-compete with a Massachusetts choice of law clause, resigned to work for its competitor Fanatics in California and relocated there a few days before his resignation. While Hermalyn filed first in California to invalidate the noncompete, DraftKings filed in Massachusetts a few days later and succeeded in obtaining a preliminary injunction against him that barred him from working for Fanatics, including in California. The case turned on what law, Massachusetts or California, applied. Brushing aside the new language in section 16600.5, the Massachusetts court found California’s minimal connection to the lawsuit was not enough to override the parties’ choice of Massachusetts law. The court found that the executive’s primary work was conducted in New York and New Jersey, with frequent travel to Massachusetts, that he didn’t perform any of his responsibilities in California, and that any harm stemming from a potential breach of the restrictive covenants in his employment agreement would be felt in Massachusetts, not California. On appeal, the First Circuit affirmed. Focusing less on the factual findings and more on the significance of Massachusetts non-compete statute, the First Circuit agreed that Hermalyn had failed to show that California’s interest was materially greater than Massachusetts’s:

Given this tableau—involving (among other features) two states passing laws reflecting different but careful balances of conflicting forces in the noncompete area (after the usual push-and-pull of politics), with Massachusetts opting not to mimic California’s ban and instead generally allowing noncompetes for higher-level employees like Hermalyn (who unlike lower-level employees often have business-sensitive info and deep ties with company customers)—we can’t say that Hermalyn has shown (as he was required to do) that California’s “interest” in pursuing its policy is not just “greater” than Massachusetts’s, but is “materially” so.

DraftKings Inc. v. Hermalyn, 118 F.4th 416, 422-23 (1st Cir. 2024)

Poer v. FTI Consulting, Inc., No. 24-CV-04725-JSC, 2024 WL 4859085 (N.D. Cal. Nov. 20, 2024) involved different facts but a similar result. There, an employee who worked and resided outside of California for a Maryland-based employer sought to invalidate his non-compete agreement under California law, arguing that he was a California employee due to occasional travel to the state. The U.S. District Court of Northern California rejected this argument, finding that the employment agreement and term sheet clearly intended for the employee’s work to be based in Nevada. The court declined to find that California’s ban applied extraterritorially and instead found that the employee was not entitled to the protections of California’s non-compete law.

To interpret the provision otherwise would mean section 16600.5[1] protects a non-California citizen working for a non-California-based employer at an office outside California. There is no indication the California legislature intended such a result, let alone that it has the authority to require such a result for non-California employers.

Id.

Clarifying Sale of Business Exceptions and What Standard Applies with Partial Sale of Business

One of California’s few exceptions to its non-compete ban is when an owner sells “all of his or her ownership interest in the business entity.” Cal. Bus. & Prof. Code § 16601. But what happens when an owner sells only some of their interest and agrees to a non-compete with the buyer in connection with that transaction? Is such a non-compete per se invalid, or should it be subject to a reasonableness standard like other sale-of-business non-competes? And does section 16601’s exception apply whenever a partial or sole owner of a company agrees to a non-compete in connection with selling their entire business interest in the company?

The California Court of Appeal addressed these and other questions in a published decision last August: Samuelian v. Life Generations Healthcare, LLC, 104 Cal. App. 5th 331, 341, (2024), as modified on denial of reh’g (Sept. 16, 2024), review denied (Nov. 13, 2024). The Samuelians were co-founders and co-owners, who sold part of their interest in their business. Following the partial sale, the business was reorganized into a manager-managed LLC, and the Samuelians stayed on as managers pursuant to a new operating agreement. Among other things, the new agreement prohibited any unitholder or manager, including the Samuelians, from engaging in the business of the Company in California except on behalf of the Company. Following a dispute, the Samuelians sued in arbitration to challenge the enforceability of the non-compete provision.

On appeal, the court held that a non-compete arising from a partial sale where the seller remains an owner of the company “cannot be deemed inherently anticompetitive and invalidated per se under section 16600,” but instead “must be scrutinized under the reasonableness standard to determine whether it has procompetitive benefits.” Id. The court emphasized that the Samuelians remained owners of the company and may be involved with its operation, thereby distinguishing the situation from one involving a terminated employee. Turning to situations where an owner sells their entire interest in a business, the court further held that “[n]oncompetition restraints following the sale of an entire business interest are still invalid per se if they do not include any goodwill, e.g., where the seller did not own a ‘substantial interest’ in the company or where goodwill was not considered in the sales price.” As an example, the court noted that a non-compete arising from an owner’s sale of its “entire one percent interest in a company would likely not meet the requirements of section 16601 and would be invalid per se.” Id. at 363.

DELAWARE

Forfeiture for Competition Embraced

Early last year, in Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024), the Delaware Supreme Court held that forfeiture-for-competition provisions in limited partnership agreements—which require employees to forfeit certain financial benefits if they compete—should be upheld and enforced, absent unconscionability, bad faith, or other extraordinary circumstances.

The court distinguished forfeiture-for-competition provisions from standard employment non-competes, where an employee is “effectively deprived of his livelihood.” Instead of applying the typical “reasonableness” analysis used for post-employment restrictions, the court in Cantor Fitzgerald employed the “employee choice” doctrine, reasoning that the forfeitures negotiated between sophisticated parties should be given the same deference as other bargained-for-terms in limited partnership agreements.

As we reported last year, the question remained as to whether the decision in Cantor Fitzgerald was applicable only to the limited partnership context or if similar provisions between employers and employees would be entitled to greater leniency than standard non-compete agreements.

In December 2024, the Seventh Circuit addressed this question in LKQ Corp. v. Rutledge, No. 110, 2024, 2024 WL 5152746 (Del. Dec. 18, 2024), a case where an employer sought to enforce forfeiture-for-competition provisions tied to restricted stock unit (RSU) agreements.

The employer, LKQ, awarded the employee, Rutledge, RSUs contingent on an agreement not to compete for nine months post-departure from LKQ. After Rutledge resigned to work for a competitor, LKQ filed suit for breach of contract and unjust enrichment, and demanded the employee repay the proceeds from all shares received and sold under the RSU agreements.

Both the Court of Chancery and the Illinois district court held that the RSU agreements, governed by Delaware law, should be treated as restraints of trade subject to reasonableness review and were therefore unenforceable. LKQ appealed the district court’s Seventh Circuit Court of Appeals. Two weeks before oral argument, the Delaware Supreme Court reversed the lower court’s Cantor Fitzgerald decision, as reported in our client alert, and upheld the enforceability of forfeiture-for-competition provisions in LLP agreements.

The Seventh Circuit therefore certified two questions to the Delaware Supreme Court: (1) whether the decision in Cantor Fitzgerald that forfeiture-for-competition provisions are enforceable is applicable only in cases within the limited partnership context, and (2) if so, what factors inform its application?

The Delaware Supreme Court answered that its decision in Cantor Fitzgerald is not restricted to the LLP context and instead applies in other circumstances, even involving employees. LKQ Corp. v. Rutledge, No. 110, 2024, — A.3d —, 2024 WL 5152746 (Del. Dec. 18, 2024). The court indicated there could be “extreme” cases where reasonableness review would be merited, but only where the provision was “so extreme in duration and financial hardship that it precludes employee choice by an unsophisticated party.”

Because of its ruling on the first question, the court declined to answer the second: what factors inform the application of the “employee choice” doctrine?

Blue Pencil Turning Red?

Despite Delaware’s embrace of forfeiture-for-competition agreements, non-competes continue to face increasing scrutiny in Delaware. As we previously reported, Delaware courts continue to decline to blue pencil non-competes they find to be overbroad, raising questions about the standard by which Delaware courts make such decisions.

Although these questions have not been clearly answered, the Delaware Supreme Court did issue a recent decision, Sunder Energy, LLC v. Jackson, 2024 WL 5052887, at *8 (Del. Dec. 10, 2024), that does provide some guidance. In Sunder, the Delaware Supreme Court declined to adopt a bright-line rule for blue penciling, affirming both (a) that courts have discretion but (b) wholesale revision would be inappropriate. But the court did indicate that blue penciling would be appropriate to reform geographic scope and where “circumstances indicate an equality of bargaining power between the parties, such as . . . or in the context of the sale of a business.” Sunder Energy, LLC v. Jackson, 2024 WL 5052887, at *8 (Del. Dec. 10, 2024).

According to the Delaware Supreme Court, those circumstances were not present in Sunder. The court instead found that the restrictive covenants in the applicable LLC Agreement were unenforceable due to a significant imbalance of bargaining power between the parties. The founder was required to sign the agreement with little opportunity to review or negotiate its terms, and he received “minimal-to-no” compensation in exchange for agreeing to the non-compete provisions. The company nevertheless argued that the non-compete should be blue penciled, given the executive’s “flagrant competitive conduct, which would have breached even a much narrower set of covenants.” The Delaware Supreme Court declined, however, to reverse the Chancery Court’s decision not to blue pencil:

[T]he relief Appellant sought was a wholesale reformation of the parties’ agreement . . . That is, the Court of Chancery could not simply constrain the Covenants’ temporal or geographic scope. The court also would have had to rewrite the persons to whom the Covenants applied and the type of conduct they restricted . . . That is the opposite of the freedom of contract principles that are esteemed by Delaware’s legal system and that Appellant has urged us to uphold.

Despite the Delaware Supreme Court’s Sunder Energy decision recognizing that blue penciling can be appropriate to reform geographic scope or in the sale of business context, the Delaware Chancery Court recently declined, again, to blue pencil a non-compete in the sale-of-business case where it found the geographic scope to be overbroad. In Cleveland Integrity Services, LLC v. Byers, C.A. No. 2024-0371-MTZ (Del. Ch. Feb. 28, 2025), the plaintiff, a pipeline inspection service, sought to enforce a two-year sale-of-business non-compete that prohibited competition anywhere in North America. While the company had customers with operations in Mexico and Canada, it apparently serviced these customers only within the United States. On that basis, the court found that the North American geographic scope was overbroad, particularly when combined with the two-year length.

The plaintiff argued that the court should blue pencil the agreement because the overreaches were only “in the margins.” But the court rejected this argument, holding:

While this Court has, in some instances, used its discretion to blue pencil overly broad restrictive covenants, doing so creates confusion, encourages employers to overreach, and encourages litigation “by building a degree of uncertainty into every employment agreement.” . . . Plaintiff has no legitimate business interest in countries outside of the United States, much less one that could support a two-year noncompete: enforcing an overbroad noncompete carries systemic costs.

The court cited Sunder Energy, but only for the proposition that it had discretion in deciding whether to blue pencil.

Cleveland Integrity is the most recent case signaling Delaware courts’ growing reluctance to blue pencil non-compete agreements they deem overbroad. We do not expect it to be the last.

[1] Cal. Bus. & Prof. Code § 16600.5.