Inside the Exclusive: Restrictive Covenants Under the Microscope—Trends and Insights

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Christine Bestor Townsend: Hello, everyone. I’m Christine Bestor Townsend. I’m joined by my colleague, Tobias Schlueter. We are at the Broadmoor in Colorado Springs where tomorrow we are going to be doing an in-depth session for our clients on restrictive covenants under state and federal law. We are excited to talk about this topic. We spend a lot of time on it. I am in our Milwaukee and Chicago offices.

Tobias Schlueter: And I am in our Chicago office. And for those who don’t know, Christine is the co-chair of our National Trade Secret and Non-competition practice group. I had the pleasure of being one of the founding members of that group and have served as co-chair and chair over the years and now am on the steering committee. But this is a space that Christine and I love. We enjoy talking about it. We enjoy advising our clients about it. And oddly, we enjoy litigating it.

Christine Bestor Townsend: Absolutely. They can be somewhat of a headache for employers as they seek to protect the company’s most important assets and keep up with the constant changes under federal and state laws. I think especially in the last decade, there’s been an explosion of change in this area.

Tobias Schlueter: Right. And I think, Christine, you’ve been studying really closely the federal ramifications, the efforts from the FTC to the NLRB and beyond. And it’s an interesting discussion, not only because of how they’ve ended or at least where they seem to be under the current administration, but I think what they portend for state law, for what’s happening at the state level in both legislatures and courts.

Christine Bestor Townsend: Absolutely. We are seeing, as Tobias said, not only a change in legislatures, but a change in the way that courts are dealing with these issues as they come before them in preliminary injunction motions, temporary restraining orders, and of course, just general litigation.

Tobias Schlueter: So, what’s going on with the feds?

Christine Bestor Townsend: Yes. So, a few years ago in January of 2023, the FTC sort of shook employers by saying that they were going to ban the use of basically all non-competes except in very limited circumstances. It was extremely far-reaching notice of proposed rulemaking and invited sort of immediate challenges and skepticism by practitioners in the space.

Tobias Schlueter: Christine and I and several of our colleagues were involved in some of the discussion groups early on, or at least the efforts to respond to requests for comments to the rule. And it seemed very clear early on, Christine, right? I mean, we had lots of conversations about this, that the FTC was going to be fairly myopic in its view that it wanted a total ban. It didn’t want to differentiate in the way that we advise our clients to do, which is appropriate. What kinds of employees should get a non-compete? What kinds of employees should get a non-solicit? Et cetera. And so, we kind of knew from the beginning that the proposed rule wasn’t going to make it through, but I think the then-Chair Lina Khan had sort of an ulterior motive at the same time that was educating courts and legislatures nationwide. But the federal rule lasted a lot longer than we thought it did, didn’t it?

Christine Bestor Townsend: It did. And so, clients were–

Tobias Schlueter: Or thought it would, right?

Christine Bestor Townsend: That’s absolutely true. It wasn’t until August of ’24 that the rule was actually struck down by a Texas federal court. It was on appeal, but just a few weeks ago, we’re recording this on September 25th, just a few weeks ago, the FTC announced they would not be pursuing the appeal, which is not very surprising. One of the things that Tobias and I have said about this space is it sort of crosses party lines. The issue of rulemaking did not. The conservative members of the commission were very against using rulemaking to ban non-competes, even though many of them had spoken about issues and problems with non-competes.

Tobias Schlueter: Right. Like the current chair, Craig Ferguson, was a member then, and he was on record of saying, “I think this is a space that we need to be in. We need to find a way to regulate it to avoid antitrust issues, but the rule is not the way to do it.”

Christine Bestor Townsend: That’s absolutely right. The rulemaking was really the issue. So, for all intents and purposes, that ban is dead. It has been for a while. Many companies never ended up doing anything to comply with the ban at the time as they awaited legal challenges. But what is important to note is the current FTC, President Trump’s second administration’s FTC, still is interested in these issues. So in February of 2025, Chair Ferguson announced a joint task force saying that here are sorts of things that fall under the FTC’s jurisdiction, including no poach, non-solicitation and no hire agreements, wage fixing agreements, and non-compete agreements that impose “unnecessary, onerous, and often lengthy restrictions on former employees’ abilities to take jobs in the same industry after they leave their employment.”

Tobias Schlueter: And keep in mind that now Chair Ferguson was a member of the Biden administration’s FTC, worked with Lina Khan, and again, took this position that the rule isn’t the way to do it, but very interested in the idea that there is some place for the FTC, there’s a role for the FTC to play here, and we’re seeing that evolve now under this new administration and approach.

Christine Bestor Townsend: That’s absolutely right. In 2016, when the DOJ and the FTC published joint guidance for HR professionals, they really were dealing with sorts of agreements between companies, non-solicitation, no poach agreements between companies. We started to see a shift certainly in President Biden’s administration and continuing in President Trump’s administration to employer-employee agreements, which a lot of us in this space were kind of thinking we’re out of the FTC’s jurisdiction for many years. And Chair Ferguson has signaled, “We’re interested in this. If you have these overbroad non-competes now,” he doesn’t define what that is for the companies, “but if you have these agreements, the FTC has a place, and we are going to be looking into that.”

Tobias Schlueter: And I’ll never forget this because he’s not alone. I think you had stated this earlier on that there’s some bilateral support here. One thing that I remember is during all the FTC craziness, you called me like, “Hey, did you see what then Senator Marco Rubio had to say about this?” I mean, “No, I missed it.” There are some prominent Republicans that were actually supportive of then-Chair Lina Khan’s efforts.

Christine Bestor Townsend: Absolutely. Tobias and I have sometimes talked about the fact that this is the only space that I’ve practiced in where Senator Rubio and Senator Booker have proposed not dissimilar bills, right?

Tobias Schlueter: And even Vice President JD Vance had some favorable things to say about what the FTC was doing then.

Christine Bestor Townsend: Exactly. So, while rulemaking certainly is not on the table, the FTC is going to continue to look into this space.

Tobias Schlueter: And it sort of captures this populist element, I think, of the Trump administration where they’re going to continue to look for ways to protect the underserved, your average workers, those who they view as being depressed in mobility and wages and otherwise through restrictive covenants.

Christine Bestor Townsend: That’s absolutely right. The other administration that was active in this space for the first time for Tobias and our colleagues in the space–

Tobias Schlueter: We became labor lawyers just a little bit.

Christine Bestor Townsend: We became labor lawyers. I’m not a labor lawyer.

Tobias Schlueter: Me either.

Christine Bestor Townsend: I’d love to refer you to my colleagues who do that well, but we became labor lawyers because former General Counsel Abruzzo said that non-competes for non-supervisory employees violated the NLRA, which for a lot of clients was very concerning because most salespeople are not supervisory employees under the NLRA, potentially engineers. There were groups of people that certainly had been subject to these agreements that the NLRB was saying, “No, this is a NLRA issue.”

Tobias Schlueter: And even where those companies were thoughtful and they were differentiating in how they applied their covenants for those particular working groups, again, Ms. Abruzzo took the same approach that Lina Khan did, sort of this myopic it’s all or nothing rather than being thoughtful and despite being encouraged to be more thoughtful about how and who ought to be regulated by this. So yeah, it was a surprise for the NLRB to get in, in our game.

Christine Bestor Townsend: Yep, it was. Now both of those memos have been rescinded by William Cohen, the acting general counsel of the NLRB. So, both of those are gone, off the table for our clients. The McLaren decision is still in effect. So, in terms of confidentiality with non-supervisory employees, that is a board decision. Those take longer to overturn, whereas the general counsel’s memos just get wiped out.

Tobias Schlueter: Right. And I mean, I don’t see this NLRB pursuing McLaren issues, but it’s a point of risk for our clients. And when it was issued, it set up this disconnect with the fact that employees have stuff, secret stuff, that they want to protect and that they need to protect. And then under trade secret law, it has this requirement like when Christine and I step into court, the first thing a court’s going to ask us in a trade secrets case is, “What’s your evidence of the reasonable efforts your client took to protect its stuff?” And the most reasonable thing that courts often look at are agreements. So now it puts employers… It put, rather, the employers at this position of having to decide, “Okay, well, I want to protect my stuff, but I want to follow the law, and I can’t do both here under this guidance or under the McLaren decision.”
So while it seems pretty clear McLaren isn’t going to be enforced, it is still the law. And so, we do have to advise our clients to be careful, and like everything they do, just be thoughtful about how they think about what they’re protecting and how they’re protecting it.

Christine Bestor Townsend: Absolutely. Speaking of being thoughtful on how we’re doing this, we always have state specific issues when we’re drafting these agreements, when we’re going to enforce these agreements. Can you talk to us about what’s happening at the state level?

Tobias Schlueter: For sure. I mean, this whole federal thing, you could write it off as being sort of a boondoggle, but that would miss the point, I think, of what I said at the beginning of Chair Khan sort of…I think she was smart enough. I think she’s smart, right? And I think an ulterior motive was to educate state legislatures and state courts and people in general of this prevailing view that restrictive covenant law needs to change. And sort of the populist thematic of that did cause state legislatures to start looking at this more closely and they’re continuing to do so now. So, let’s set the stage, right? I mean, so the impact of the FTC rulemaking is widespread.
Today, at least as of July, there are 87 bills in 37 states ranging from total bans to wage thresholds, not allowing people under a certain wage to sign certain restrictive covenant agreements, notice provisions, which is a new hot area because they’re looking…They want to provide transparency to employees about what they’re signing and why they’re signing. And they figure that notice provisions does that. And then there are seven of these proposed statutes that have penalties for getting it wrong.
Interesting trend, healthcare. Healthcare is blown up in the last couple of years. We’ve seen…It used to be just doctors, and then it was doctors and nurses, and now for a number of states, it’s everything related to healthcare. It’s nurses’ aides; it’s nurse practitioners; it’s where they’re trying to either, if not a total ban, they make strong exceptions or strong guardrails rather for how and when restrictive covenants can be used with those people.
So, let’s talk about what are the numbers today. So, that’s what’s happening. And not many of those laws are actually going to mature. They almost never do. There actually is always a high volume of legislation about restrictive covenants. So, none of that’s shocking, but it gives a sense of what states are thinking about.
For Christine and me, what we see and what we’ll often advise, I mean, the highest activity at state level is low wage for restrictive covenants. We see fewer and fewer bans. There’s only five now that have complete bans of non-competes, but the timing and notice requirements. I think those will continue to percolate through into law. I think the low wage efforts will continue to percolate through to law. And then having some sort of penalty structure for that, I think there’s some appetite for it, but the business community, of course, is weighing in on this as well.
So, just by the numbers, there are 11 states plus DC that have low wage requirements currently. There are 14 states that have timing and notice requirements. 18 states require consideration more than employment for a non-compete, 13 for a non-solicit. Eight states impose penalties for getting it wrong.
And this is an interesting stat. There are a number of statutes that impose by statute attorney’s fees. If a company pursues relief or enforcement of restrictive covenant and gets it wrong, which is unusual because normally the right to attorney’s fees is a contractual issue. It’s not usually imposed in this space. And then the newest non…Sort of the healthcare, there are currently 24 states that actually have laws relating to healthcare. And then the newest updates not relating to healthcare are in Virginia, Washington, and Wyoming. Virginia now is a bar for non-exempt employees and signing restrictive covenants. Washington has a law that limits customer non-solicits to current customers. And Wyoming purports to be a ban, but then when you read all the exceptions, it’s really not. So, kind of an interesting trick that they’re doing there.

Christine Bestor Townsend: I think on Virginia, in terms of the not allowing it for non-exempt employees, a lot of these low wage statutes, I think are a recognition by legislatures that we do need to be more thoughtful that the $15 an hour employee should not be signing these agreements. And when we say low wage, in some of the states, these are pretty darn high. We’re talking about six figures for non-competes. So, that is a trend I think we’re going to continue to see. And I think on the business side, as businesses are looking at these agreements and trying to make them enforceable and thoughtful and not this one-size-fits-all approach where we’ve got a junior hire who’s working in the copy room agreeing to a non-compete, they’re sort of baking that in. And I think that the low wage requirements are sort of a stand-in for a recognition that a certain level of employees should be the people that are signing these agreements.

Tobias Schlueter: Right. And in my experience with working with clients, I know it’s yours too, they’re getting more thoughtful–

Christine Bestor Townsend: Absolutely.

Tobias Schlueter: –about these things and they are getting more differentiated. And so, the discussion is who do you really need a non-compete from? And as you walk through what the metrics are of what that involves, most are like, “Yeah, I only need it for this group of people.” With the idea that courts don’t want to see a nuclear weapon used when a fly swatter will suffice.

Christine Bestor Townsend: Right.

Tobias Schlueter: So, it’s sort of convincing and having the discussion with our clients so they see it, what are the fly swatter groups for these things and what balances their right for employment and mobility and the things attached to it.
The only other trend that I wanted to just quickly talk about, and there are plenty. There are unique issues to drafting in this quagmire of sort of state laws and unique laws. And Christine and I have gotten really adept at drafting those agreements. But a big trend right now, and it’s something we continue to see across wage and hour leave laws, various laws that relate to employees is remote work and hybrid work. There was this idea that if you’re a remote employee and you have a restrictive covenant about competition in your state and you’re working out of your house and then you work for a new employer, you’re still in your state, still in the area where you were working for your old employer, but now you’re doing your work directed for the new employer to a totally different state, is that bound by the restrictive territory provision of an agreement?
And the courts that have, maybe surprisingly, maybe not surprisingly, courts that have considered this so far have almost universally held it’s about where the employee is directing the work rather than, for these remote employees, rather than where they’re sitting. So, courts have allowed employee to sit in the same state they were in, they worked for old co, but as long as they were directing their work to a different area conforming to the restrictive covenant territory limitation, they have so far allowed it. I think that’s an interesting thing that we’re going to continue to track.

Christine Bestor Townsend: This area is constantly changing. It’s what makes it fun to practice in and sometimes frustrating to practice in and certainly frustrating for companies trying to continue to comply with the law.

Tobias Schlueter: Totally true. And this was fun to spend some time with all of you just to run through the 40,000-foot view. But Christine and I are pretty confident that you can carry a cocktail party conversation on restrictive covenants when you’re with friends and family over the holidays now. You’re welcome.

Christine Bestor Townsend: Have a wonderful day. Thank you for listening.

Tobias Schlueter: Take care.

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