Non-Compete and Non-Solicit Agreements in M&A: Sale-of-Business vs Employment Context

Q: What is the difference between a sale-of-business non-compete and an employment non-compete?

The distinction between a sale-of-business non-compete and an employment non-compete is fundamental to understanding how these covenants are regulated and enforced. A sale-of-business non-compete is a covenant given by the seller of a business to the buyer as part of an asset purchase agreement (APA) or business purchase transaction. Its purpose is to protect the goodwill the buyer is paying for: the buyer is paying a purchase price that includes the value of customer relationships, brand reputation, and market position, and the seller's non-compete protects that value by preventing the seller from immediately competing and undermining what was purchased. Courts and legislatures have historically treated sale-of-business non-competes more favorably than employment non-competes because the seller received substantial consideration (the purchase price) and typically had market power to negotiate the terms. An employment non-compete, by contrast, is a covenant given by an employee to an employer, often at the inception of employment or during the employment relationship. The power imbalance between employer and employee has led most states to scrutinize employment non-competes carefully, and several states have banned them outright or imposed significant limitations. When a seller continues as an employee of the buyer post-close, the non-compete in the APA is a sale-of-business covenant, but any separate employment agreement non-compete is analyzed under employment law principles. The two frameworks can apply simultaneously to the same individual.

Q: What is the current status of the FTC's Non-Compete Rule?

The Federal Trade Commission issued a final rule in April 2024, effective September 4, 2024, that would have banned most employment non-compete agreements nationwide. The rule included a narrow sale-of-business exception that preserved non-competes entered into in connection with a bona fide sale of a business entity, of the person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets. This exception was intended to preserve the ability of buyers to obtain seller non-competes in genuine business acquisitions. However, the FTC rule was challenged in federal court, and in August 2024, the U.S. District Court for the Northern District of Texas issued a nationwide injunction blocking the rule from taking effect, holding that the FTC exceeded its statutory authority. As of April 2026, the rule remains enjoined pending further litigation and potential appeal. The legal landscape for employment non-competes thus remains governed by state law, which varies dramatically from state to state. Buyers and sellers negotiating non-compete provisions in M&A transactions should work with counsel who is current on the status of the FTC rule litigation and the applicable state law in the relevant jurisdictions.

Q: Which states have banned or severely restricted employment non-competes?

The spectrum of state non-compete enforceability has shifted dramatically in recent years, with an increasing number of states banning or severely restricting employment non-competes. California is the most prominent example: Business and Professions Code section 16600 broadly voids employment non-competes, with limited exceptions. Minnesota enacted a complete ban on employment non-competes effective July 1, 2023, under Minn. Stat. section 181.988, making non-compete agreements signed after that date void and unenforceable. Oklahoma and North Dakota have long maintained statutory prohibitions on non-compete agreements. Colorado allows employment non-competes only for employees earning above a specified income threshold, which is adjusted annually, and even then limits them to 12 months' duration. Illinois restricts employment non-competes to employees earning above a salary threshold and requires at least 14 days to review the agreement, among other requirements. Massachusetts enacted the Massachusetts Noncompetition Agreement Act in 2018, which imposes strict requirements including a maximum 12-month duration, a geographic scope limited to the area in which the employee provided services or had material presence, and a requirement of garden leave pay or other mutually-agreed consideration during the restriction period. States that continue to broadly enforce employment non-competes include Texas (with reasonableness limitations), Florida (with a statutory enforcement framework), and many southern and midwestern states.

Q: What is a non-solicitation agreement and how does it differ from a non-compete?

A non-solicitation agreement restricts a former employee or seller from soliciting specific identified relationships rather than broadly prohibiting competition. Non-solicitation covenants come in two primary forms: non-solicitation of customers and non-solicitation of employees. A customer non-solicit restricts the covenanting party from soliciting the business's existing customers or clients for a defined period after the separation or closing. An employee non-solicit restricts the covenanting party from recruiting or hiring the business's employees. Non-solicitation agreements are generally viewed more favorably by courts than broad non-compete agreements because they are more targeted: they restrict specific conduct (soliciting identified relationships) rather than broadly prohibiting all competitive employment or business activity. However, in states that broadly restrict or ban non-competes, courts have sometimes applied the same analysis to broad non-solicitation agreements, particularly customer non-solicits that have the practical effect of preventing the covenanting party from practicing their profession in any meaningful way. In M&A transactions, both types of non-solicitation covenants appear: buyer non-solicits restrict the seller from soliciting the acquired customer base post-close, and buyer non-solicits of acquired employees may also appear to protect the workforce the buyer is acquiring.

Q: How is geographic and temporal reasonableness analyzed in non-compete enforcement?

Courts evaluating the enforceability of non-compete agreements apply a reasonableness standard to both the geographic scope and the temporal duration of the restriction. The analysis differs between sale-of-business non-competes and employment non-competes. For sale-of-business non-competes, courts generally apply a more permissive reasonableness standard, allowing broader geographic scope and longer duration commensurate with the geographic reach of the business sold and the period necessary to protect the goodwill that was purchased. If a seller sold a nationwide business, a nationwide geographic restriction may be reasonable. If the seller sold a regional business with customers primarily in a three-state area, a nationwide restriction would likely be broader than necessary. For employment non-competes in states that permit them, the geographic scope must be tied to the area in which the employee actually worked or competed, and courts regularly reduce or void restrictions that cover territory where the employee had no customer relationships or business presence. Temporal duration for sale-of-business non-competes commonly runs two to five years, with courts occasionally enforcing longer periods when the seller received substantial consideration and the business has long relationship cycles. Employment non-compete durations above two years are scrutinized carefully in most jurisdictions, and states like Massachusetts cap employment non-competes at 12 months.

Q: What is blue-penciling and how does it affect non-compete enforcement?

Blue-penciling refers to the judicial practice of modifying an overbroad non-compete agreement rather than declaring it entirely void and unenforceable. Courts in blue-pencil jurisdictions will strike the offending language and enforce what remains, or will rewrite the scope, duration, or geographic restriction to make it reasonable. Courts in reformation jurisdictions go a step further, rewriting the agreement to impose whatever scope and duration the court determines is reasonable in the circumstances. Not all jurisdictions apply these doctrines. California and several other states apply a strict rule of invalidity: an overbroad non-compete is void in its entirety, not merely modified to a reasonable scope. The red-pencil doctrine, used in some jurisdictions, voids non-competes entirely if any provision is found unenforceable, rather than modifying or severing the offending language. In M&A transactions, counsel drafting seller non-competes should be aware of the governing jurisdiction's approach to overbroad covenants. If the governing state applies strict invalidity rather than modification, drafting a covenant that is even slightly overbroad may result in total invalidation rather than judicial narrowing, leaving the buyer without any protection.

Q: What consideration is required for a valid non-compete in M&A?

Consideration requirements for non-competes differ substantially between sale-of-business and employment contexts. In sale-of-business transactions, the purchase price paid for the business constitutes valid consideration for the seller's non-compete covenant. Courts uniformly hold that a seller who receives a substantial purchase price for a business has given adequate consideration for a reasonable non-compete. The non-compete is typically a negotiated term of the deal, and the consideration is the overall purchase price, not a separate payment specifically allocated to the covenant (though some APAs allocate a portion of the purchase price to the covenant for tax purposes). In employment contexts, consideration requirements are more complex and state-specific. Most states require that employment non-competes be supported by consideration beyond the initial offer of employment if they are presented after the employment relationship has begun. Continued employment alone is generally insufficient consideration for a new non-compete in states that require additional consideration, such as a raise, bonus, promotion, or other benefit. Fresh consideration is also required if an employer wishes to materially modify a non-compete that was signed at the inception of employment. When a seller continues as an employee of the buyer post-close, the seller's APA non-compete is supported by the purchase price, but any separate employment agreement non-compete should also be independently supported by employment-context consideration.

Goodwill is a central component of value in most business acquisitions. A buyer paying a purchase price above the tangible asset value of a business is, in material part, paying for the seller's customer relationships, market position, and reputation. A non-compete covenant in the acquisition agreement protects that investment by restricting the seller from immediately opening a competing business and drawing back the customers and relationships the buyer just paid for. Without an enforceable non-compete, the buyer's goodwill acquisition may be worth substantially less than the purchase price suggests.

The legal framework governing non-compete covenants in M&A has become increasingly complex in recent years. The FTC's 2024 rulemaking, even in its enjoined state, signals a federal regulatory posture hostile to broad non-compete restrictions, and the patchwork of state laws ranges from California's near-total ban to Florida's statutory enforcement framework that explicitly favors enforcement. Buyers negotiating non-compete provisions must know which legal framework applies, what requirements that framework imposes, and how to draft covenants that will withstand challenge.

This guide is part of the Employment Law in M&A: A Legal Guide for Buyers, Sellers, and Key Employees. It covers the full non-compete and non-solicit framework for M&A transactions: the sale-of-business versus employment context distinction, the FTC rule's current status, state-by-state enforcement, California's section 16601 exception, non-solicitation structures, geographic and temporal reasonableness, blue-penciling and reformation, consideration requirements, executive versus rank-and-file treatment, the seller's covenant in the APA, buyer non-solicits of acquired employees, choice of law, trade secret overlap, and garden leave alternatives.

Parties evaluating the broader deal structure should review the M&A deal structures guide and the asset purchase vs stock purchase guide. The structure of the transaction affects how seller non-competes are characterized and how state law applies to the governing documents.

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Sale-of-Business vs Employment Context: The Foundational Distinction

The threshold analytical question in any M&A non-compete analysis is which legal framework governs the covenant: sale-of-business law or employment law. This determination affects the applicable standard of review, the permissible scope and duration, the consideration required, and whether the covenant can be reformed if overbroad. Courts and legislatures have historically drawn a clear distinction between these two frameworks based on the economic power dynamics and the nature of the consideration involved.

In the sale-of-business context, the covenant is an integral component of a freely negotiated commercial transaction. The seller is typically a business owner with legal counsel and market power to negotiate. The consideration is a purchase price that reflects the full value of the business, including goodwill. Both parties understand that the non-compete is part of what is being bought and sold. Courts applying this framework routinely enforce non-competes with geographic scope commensurate with the geographic reach of the business and temporal duration of two to five years or more when the circumstances warrant.

In the employment context, the analysis shifts. An employee typically has less negotiating power than an employer, and the employment non-compete may have been presented as a condition of employment with limited negotiation opportunity. The consideration may be only the initial job offer, continued employment, or a modest additional payment. The restriction may prevent the employee from working in their chosen field for a substantial period. Legislatures in an increasing number of states have responded to these power imbalances by banning or severely restricting employment non-competes.

When the seller becomes an employee: The most common complexity arises when the seller of a business continues post-close as an employee of the buyer. In this scenario, the seller is simultaneously a party to a sale-of-business non-compete in the APA and potentially a party to an employment non-compete in a separate employment agreement. Some courts have scrutinized whether the APA non-compete in a seller-employee scenario is genuinely a sale-of-business covenant or is functionally an employment non-compete dressed in different language. Buyers should ensure that seller non-competes in seller-employee transactions are structured and documented as sale-of-business covenants supported by the purchase price, not as a mechanism for obtaining a broader employment restriction than the applicable state would otherwise permit.

The FTC Non-Compete Rule: 2024 Rulemaking and Ongoing Litigation

In April 2024, the Federal Trade Commission issued a final rule that would have fundamentally altered the national non-compete landscape. The rule declared non-compete clauses with workers to be an unfair method of competition and would have invalidated existing employment non-compete agreements and prohibited new ones prospectively. The rule's effective date was set for September 4, 2024. If it had taken effect, it would have represented the most significant federal intervention in non-compete law since the enactment of the Sherman Antitrust Act.

The rule included a sale-of-business exception that preserved non-compete covenants entered into pursuant to a bona fide sale of a business entity, of the person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets. This exception was explicitly designed to preserve the ability of buyers to obtain seller non-competes in genuine business acquisitions, recognizing that the goodwill-protection rationale for these covenants is fundamentally different from the employer-employee power dynamic that the rule targeted.

FTC Rule Status as of April 2026

Rule issued: April 2024. Would have banned most employment non-competes nationally and required employers to rescind existing non-competes.

Nationwide injunction: August 2024. U.S. District Court for the Northern District of Texas enjoined the rule nationwide, holding the FTC exceeded its statutory authority under Section 6(g) of the FTC Act.

Current status: Rule remains enjoined as of April 2026. Employment non-competes continue to be governed by applicable state law. The sale-of-business exception would have preserved M&A non-competes even if the rule had taken effect.

Practical impact: State law governs. The FTC rule's ultimate fate does not currently affect M&A non-compete drafting, but the sale-of-business exception's language provides useful guidance on what regulators consider a legitimate business-sale covenant versus an employment restriction.

Even in its enjoined state, the FTC rule has influenced the legal and regulatory environment around non-competes. State attorneys general have become more active in scrutinizing employment non-compete enforcement. Federal enforcement through the FTC's unfair competition authority remains a background risk for broad employment non-competes, particularly in industries with significant worker power concerns. Buyers drafting non-compete provisions in employment agreements for post-close key employees should structure those covenants with awareness that the regulatory environment may shift, and should rely primarily on the APA's sale-of-business non-compete for the core goodwill protection they need.

California Business and Professions Code 16600: The Sale-of-Business Exception

California's approach to non-competes is the most restrictive in the United States. Business and Professions Code section 16600 declares that every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. California courts have enforced this provision broadly, refusing to apply the rule of reason to employment non-competes even when a more permissive analysis might allow a narrowly tailored restriction. The practical result is that employment non-competes governed by California law are generally unenforceable, with limited exceptions.

California Business and Professions Code section 16601, however, creates an express exception for non-competes entered into in connection with the sale of the goodwill of a business, the sale of all shares or all of the ownership interests in a business entity, or otherwise acquiring all of the ownership interests of a business entity by purchase or by other means. The exception applies to the seller or owner who holds a substantial interest in the business. This provision recognizes that the goodwill the buyer purchases includes the seller's personal relationships and reputation, and that protecting the buyer's goodwill investment by restricting the seller's competition is a legitimate commercial purpose distinct from employee restraint.

Requirements for Section 16601 Compliance

To invoke the section 16601 exception in California, the non-compete must be entered into in connection with a qualifying transaction: a sale of goodwill, a sale of all shares or ownership interests, or an acquisition of all ownership interests. The seller or covenantor must hold a substantial ownership interest in the business. California courts have not established a precise ownership percentage threshold for "substantial interest," but the requirement is designed to exclude employees who may hold nominal equity from being subjected to sale-of-business non-competes when they are functionally employees rather than owners.

The scope of the non-compete must also be limited to the business being sold. A seller who sells a software company cannot be restricted from practicing law; the restriction must relate to the specific business enterprise transferred. Geographic scope must be reasonably tied to the area in which the sold business operated, and temporal duration must be reasonable in light of the business's customer relationship cycles and the consideration paid. California courts apply reasonableness review to section 16601 non-competes, but the baseline protection provided by the sale-of-business context means that reasonably scoped covenants in genuine business sale transactions should be enforceable even in California.

California's 2024 clarification: California amended Business and Professions Code section 16600 effective January 1, 2024, to clarify that the section applies regardless of where or when the contract was signed, and that California courts must void non-compete agreements that violate the statute regardless of a choice-of-law clause selecting another state's law. This amendment was a direct response to employer attempts to use out-of-state choice of law clauses to enforce non-competes against California employees. Buyers acquiring California businesses and using non-California choice-of-law clauses in employment agreements for California-based employees should be aware that California courts will apply California law to those employment non-competes regardless of the contractual choice-of-law provision.

State Enforcement Spectrum: From Ban to Broad Enforcement

The enforceability of employment non-competes varies dramatically across state lines, and the gap between the most restrictive and most permissive states has widened in recent years as legislative reform has accelerated. Any buyer acquiring a multi-state business or employing workers in multiple states must understand the spectrum.

States with Near-Total or Complete Employment Non-Compete Bans

California (Bus. and Prof. Code section 16600), Minnesota (Minn. Stat. section 181.988, effective July 1, 2023), Oklahoma (Okla. Stat. tit. 15, section 219A), and North Dakota (N.D. Cent. Code section 9-08-06) effectively prohibit employment non-competes. Minnesota's 2023 amendment makes the state the most recent addition to the ban category, voiding all non-compete agreements entered into with Minnesota employees after July 1, 2023. Oklahoma permits limited exceptions for non-competes entered in connection with a sale of a business but broadly prohibits employment restrictions. North Dakota has one of the oldest statutory prohibitions, voiding contracts that restrain a lawful profession, trade, or business.

States with Income Thresholds and Strict Limitations

Colorado, Illinois, and Washington state allow employment non-competes only for employees above specified income thresholds. Colorado's Restrictive Employment Agreements Act (CREA), codified at Colo. Rev. Stat. section 8-2-113, limits non-compete agreements to employees earning above the threshold set by the Colorado Secretary of State (adjusted annually). Illinois allows non-competes for employees earning above $75,000 per year under the Illinois Freedom to Work Act, and requires a 14-day review period and independent counsel advisement for agreements with employees earning above $200,000. Washington permits non-competes only for employees earning above a specified threshold and limits their duration to 18 months without a presumption of unreasonableness.

States with Reasonableness Review and Statutory Frameworks

Florida occupies an unusual position: Florida Statutes section 542.335 establishes a detailed statutory framework that actually favors non-compete enforcement. Florida courts must enforce non-competes that are reasonable in time, area, and line of business, and must apply a presumption in favor of enforcement that the employee seeking to void the covenant must overcome. Texas applies common-law reasonableness review under the Covenants Not to Compete Act, Tex. Bus. and Comm. Code section 15.50, requiring that the covenant be ancillary to an otherwise enforceable agreement, supported by consideration, and reasonable in scope. Most remaining states apply common-law reasonableness review that examines geographic scope, temporal duration, and the legitimate business interests the employer seeks to protect.

State Non-Compete Enforcement Quick Reference

Ban states: California, Minnesota, Oklahoma, North Dakota. Sale-of-business exceptions may apply.

Income-threshold states: Colorado, Illinois, Washington. Non-competes permitted above salary thresholds with additional conditions.

Strict-limit states: Massachusetts (12-month max, garden leave), Maine (above wage threshold), Oregon (limited scope).

Enforcement-favoring states: Florida (statutory presumption of enforcement), Texas (statutory framework with reasonableness), most southern and midwestern states (common-law reasonableness).

Non-Solicitation of Employees and Customers: Scope and Enforcement

Non-solicitation covenants are distinct from non-compete covenants in their scope and, historically, in their enforceability. A non-compete broadly restricts competition. A non-solicit restricts specific conduct: recruiting employees away from the business, or soliciting customers to transfer their business. In M&A, both types of non-solicitation covenants serve distinct purposes.

A customer non-solicitation restricts the seller from soliciting the acquired company's existing customers for a defined period after closing. This covenant is narrower than a full non-compete because it allows the seller to compete generally but restricts the seller from targeting the specific customer relationships the buyer acquired. Courts generally view customer non-solicits as more reasonable than broad non-competes because they protect a defined set of identified relationships rather than all potential business opportunities. However, when the seller's expertise or market is so concentrated that the customer non-solicit effectively prevents any meaningful competition, courts in restrictive states have sometimes analyzed customer non-solicits with the same skepticism applied to non-competes.

An employee non-solicitation restricts the seller from recruiting or hiring the acquired company's employees after closing. Buyers use employee non-solicits to protect the workforce they are acquiring, which may include key employees with specialized knowledge, customer relationships, or proprietary skills. Employee non-solicits have come under increasing scrutiny in several states: California treats them with the same skepticism as non-competes, and some state legislatures have explicitly extended non-compete reform statutes to include employee non-solicitation restrictions that have the practical effect of limiting employee mobility.

Drafting the customer non-solicit in the APA: A customer non-solicit should identify the scope of restricted customers with sufficient precision to be enforceable and administrable. "All customers of the business" is common and generally acceptable in sale-of-business contexts, but the covenant should specify whether it covers customers at the time of closing, customers within a defined lookback period, or prospective customers in the pipeline. The restricted conduct should be defined as active solicitation rather than mere competition: the covenant should restrict the seller from initiating contact with customers for competitive purposes, but should not prohibit the seller from responding to customers who independently seek out the seller's services after closing.

Employee non-solicit scope: Employee non-solicits should be limited to employees of the acquired business and should restrict active recruitment rather than prohibiting the seller from hiring employees who independently apply for positions. Overly broad employee non-solicits that prohibit any interaction with former employees, including social or professional networking, are likely overbroad and may be reduced or voided in scrutinous jurisdictions. The restricted period for employee non-solicits in the sale-of-business context commonly runs two years, consistent with non-compete duration, though some practitioners use shorter periods for employee non-solicits than for customer non-solicits.

Buyer non-solicitation of acquired employees: The reverse non-solicit, where the buyer agrees not to solicit employees of the seller who are not hired post-close, is less common but appears in some transactions where the seller retains part of the business or the parties have an ongoing relationship post-close. Buyer non-solicits of acquired employees are an unusual covenant structure and their purpose and scope should be clearly defined in the purchase agreement to avoid ambiguity about which employees are covered and for how long.

Garden Leave and Alternative Covenant Structures

Garden leave arrangements have emerged as an alternative to traditional non-compete covenants, particularly in employment contexts where non-competes face increasing enforceability challenges. In a garden leave arrangement, the employer retains the employee's active employment status during the restriction period, continuing to pay salary and benefits but requiring the employee to stay away from work. The employee remains on the payroll, continues to accrue benefits, and does not compete during the garden leave period because they remain technically employed.

Massachusetts has explicitly incorporated a garden leave requirement into its Noncompetition Agreement Act, which requires employers to either provide garden leave pay equal to at least 50 percent of the employee's highest annualized base salary during the non-compete period, or provide other mutually agreed-upon consideration. This requirement makes traditional unpaid post-employment non-competes unenforceable in Massachusetts for employees unless garden leave compensation is provided. Employers in other states are increasingly considering garden leave arrangements as a way to support the enforceability of non-compete restrictions by providing clear consideration for the restriction period.

In the M&A context, garden leave arrangements are less common for seller non-competes in the APA because the purchase price itself constitutes consideration. Garden leave is more relevant for employment non-competes applicable to key employees retained post-close who are not themselves sellers of the business. When a buyer retains key employees who are not selling equity and wants enforceable post-employment restrictions on those employees, garden leave pay during the restriction period is a mechanism that supports enforceability in scrutinous jurisdictions and demonstrates genuine consideration.

Structuring Non-Compete and Non-Solicit Provisions for an M&A Transaction?

Alex Lubyansky works with buyers and sellers on non-compete strategy, APA covenant drafting, state-law compliance analysis, and enforcement planning for M&A transactions. Submit your transaction details for an engagement assessment.

Geographic and Temporal Reasonableness in Sale-of-Business Non-Competes

Even in states that broadly enforce sale-of-business non-competes, courts examine whether the geographic scope and temporal duration are reasonable in light of the business sold and the consideration paid. The standard is more permissive than employment non-compete reasonableness review, but it is not unlimited. Buyers drafting seller non-competes should calibrate scope and duration to the actual competitive footprint of the business acquired, not to the broadest restriction the buyer can imagine.

Geographic scope should correspond to the area in which the sold business actually competed or had customer relationships. A business with customers in five midwestern states supports a restriction covering those five states. A business with national customer relationships supports a national restriction. A business with purely local operations supports a restriction defined by the local market area. Courts regularly reduce geographic restrictions that sweep in territory where the seller had no customer relationships or business presence, and in some jurisdictions, an overbroad geographic restriction can render the entire covenant unenforceable.

Temporal duration for sale-of-business non-competes is typically two to five years. Two-year restrictions are nearly universally enforceable in sale-of-business contexts when the geographic scope is reasonable. Three-year restrictions are common and generally enforceable for businesses with established customer relationships and longer sales cycles. Five-year restrictions are supported in some jurisdictions and industries where customer relationships are long-term and the seller's goodwill has particular durability. Restrictions exceeding five years are uncommon and should be supported by specific facts about the business's customer relationship patterns and the seller's competitive influence in the market. Courts enforce five-year restrictions in sale-of-business contexts more readily than in employment contexts, where restrictions of more than two years are often viewed skeptically.

Blue-Pencil, Reformation, and the Risk of Total Invalidity

When a court finds that a non-compete is overbroad, the remedy depends on which approach the governing jurisdiction applies. The options range from complete enforcement as written (in jurisdictions with minimal scrutiny), to partial enforcement through blue-penciling, to complete reformation with judicially revised terms, to total invalidation.

Blue-penciling allows courts to strike overbroad language while enforcing the remaining valid restrictions. A classic blue-pencil scenario involves a non-compete with an overbroad geographic restriction: the court strikes the language extending the restriction to states where the seller had no customers and enforces the restriction as written for the narrower geographic area. Blue-penciling requires that the valid restriction be separable from the invalid language, so that striking the offending provision leaves an enforceable remaining covenant rather than a commercially meaningless fragment.

Reformation goes further: a reforming court rewrites the covenant to impose the restriction the court determines is reasonable, rather than merely striking invalid language. Courts in reformation jurisdictions have rewritten geographic restrictions, shortened temporal periods, and narrowed the scope of restricted activities. Texas applies a reformation approach to the extent it is necessary to make the covenant reasonable and enforceable. Reformation provides more flexibility than blue-penciling but also gives courts wider discretion to alter the parties' deal.

The red-pencil risk: Several jurisdictions apply a red-pencil or totality-of-the-covenant approach that voids the entire non-compete if any provision is found unreasonable, rather than modifying or severing the offending language. California's broad invalidity rule operates this way for employment non-competes: the statute voids the covenant rather than modifying it to a permissible scope. Buyers drafting seller non-competes in red-pencil jurisdictions must exercise particular care to avoid any provision that could be found overbroad, because an overbroad provision could render the entire covenant unenforceable rather than simply being modified. Including severability clauses at the covenant level, separating distinct restriction types (geographic non-compete, customer non-solicit, employee non-solicit), and calibrating each restriction to its own defensible scope can reduce the risk that a finding of partial invalidity destroys the entire protection structure.

Executive vs Rank-and-File: Tiered Covenant Structures

Not all employees in an acquired business warrant the same level of post-close restriction. A tiered approach to non-compete and non-solicit covenants recognizes that executives, key sales personnel, and employees with access to trade secrets pose different competitive risks than general workforce employees. Applying the same broad restriction across all employees both creates legal risk (courts are less tolerant of broad restrictions on lower-wage workers) and commercial risk (it may deter qualified candidates from joining the business post-close).

For senior executives and key employees who participated in the sale process, had significant customer relationships, or have access to proprietary business strategies, broader restrictions may be warranted and enforceable. These employees typically receive retention bonuses, employment agreements with enhanced compensation, or other substantial consideration that supports a broader covenant. The duration of their restrictions may appropriately extend to match or approach the duration of the seller's APA non-compete.

For general workforce employees retained post-close, broad non-compete restrictions are legally vulnerable in an increasing number of states, particularly with the trend toward income threshold requirements. A tiered structure might provide general workforce employees with only a customer non-solicit and employee non-solicit for a shorter period, reserving full non-compete restrictions for senior management and key technical employees. This approach reduces legal risk, reduces talent retention friction, and still protects the most significant competitive interests the buyer needs to address.

Drafting the Seller's Non-Compete in the Asset Purchase Agreement

The seller's non-compete in an asset purchase agreement (APA) is one of the most consequential provisions the parties will negotiate. It determines what the seller can do after closing and for how long. A well-drafted covenant gives the buyer the protection it needs without creating enforcement risk. A poorly drafted covenant may be unenforceable when the buyer tries to enforce it, leaving the buyer without recourse against a seller who immediately re-enters the same market.

The APA non-compete should be drafted as a standalone, clearly defined covenant with its own defined terms. The business being sold should be precisely defined to establish the competitive scope. Competing activity should be defined with reference to the specific products or services the sold business provided, not as all possible activities that might compete with any business the buyer conducts. The geographic restriction should be tied to the territory where the sold business operated and had customers, defined as specifically as the business's geographic footprint permits.

The covenant should expressly identify the covenantor: the selling entity, the selling individual(s) with ownership interests, and any family members or affiliated entities through which the seller might indirectly compete. Courts have found that non-competes that bind only the corporate seller and not the individual owners who will actually take competitive action provide limited practical protection. Buyer's counsel should identify all potential indirect competitive paths and ensure the covenant's binding scope covers them.

APA Non-Compete Covenant Checklist

✓Define the "Competitive Business" by reference to the specific products, services, and customer types of the sold business
✓Define the "Restricted Territory" tied to the geographic footprint of the sold business's actual customer relationships and operations
✓Name all Covenantors: selling entity, individual owners above a specified equity threshold, key principals, and affiliated entities that might indirectly compete
✓Specify the Restricted Period and its start date (typically the Closing Date) with a clearly defined end date
✓Include a customer non-solicit covering customers of the sold business at or within a specified period before Closing
✓Include an employee non-solicit covering key employees of the acquired business for a defined period
✓Carve out passive investment in publicly traded companies below a specified ownership percentage
✓Include a provision acknowledging that breach would cause irreparable harm, supporting injunctive relief without bond
✓Select governing law and forum with awareness of how the chosen jurisdiction treats sale-of-business covenants

The non-compete covenant fits within the broader framework of the asset purchase agreement. For context on how non-compete provisions interact with representations, indemnification, and other closing conditions in the APA, review the indemnification provisions guide and the broader asset purchase vs stock purchase framework.

Choice of Law and Forum Selection for Non-Compete Enforcement

Choice of law and forum selection clauses are strategic tools in non-compete drafting, but they have significant limitations that buyers must understand before relying on them to create a more favorable enforcement environment. The basic premise of a choice-of-law clause is that the parties can select the law of a particular state to govern their agreement, allowing them to choose a non-compete-friendly jurisdiction even when the seller or employee lives and works in a state that would restrict the covenant.

This strategy has become significantly less reliable for employment non-competes in the past several years. California's 2024 statutory clarification explicitly provides that courts shall enforce California law and void non-compete agreements that violate section 16600 regardless of the parties' choice-of-law selection. Minnesota's 2023 non-compete ban applies to agreements with Minnesota employees regardless of choice-of-law clauses. Courts in multiple states have invoked the "fundamental public policy" doctrine to override contractual choice-of-law selections when the chosen law would enforce a non-compete that the forum state has declared void as against public policy.

For sale-of-business non-competes, choice of law remains more meaningful because most states with anti-non-compete statutes include express carve-outs for sale-of-business covenants. A sale-of-business non-compete in an APA governed by Texas or Florida law is likely to be enforced in those jurisdictions even if the seller resides in California, provided the covenant is structured as a genuine sale-of-business restriction rather than an employment covenant. However, buyers should not assume that a favorable choice-of-law clause in the APA will automatically override the seller's state of residence law in all circumstances.

Trade Secret Overlap and the Defend Trade Secrets Act

Non-compete covenants and trade secret protection are related but distinct mechanisms for protecting a buyer's investment in acquired goodwill and proprietary information. They overlap significantly: the seller who violates a non-compete often does so by using the acquired company's trade secrets in a competing venture. Understanding how these two frameworks interact allows buyers to build a more comprehensive protection structure and to identify which mechanism provides the most effective remedy in a given breach scenario.

The Defend Trade Secrets Act (DTSA), 18 U.S.C. section 1836, creates a federal civil cause of action for misappropriation of trade secrets. Trade secrets under the DTSA include formulas, patterns, compilations, programs, devices, methods, techniques, or processes that derive independent economic value from not being generally known and are subject to reasonable measures to keep them secret. Customer lists, pricing formulas, proprietary processes, and business strategies can qualify as trade secrets when properly protected. The DTSA is available in federal court regardless of state law and provides injunctive relief, damages, and in cases of willful misappropriation, exemplary damages up to two times the actual damages plus attorneys' fees.

In an M&A context, the buyer should ensure that the acquired company's trade secrets are identified in the due diligence process and that appropriate confidentiality and trade secret protection measures are in place at closing. If the seller later violates the non-compete and uses the acquired company's trade secrets in a competing venture, the buyer may pursue claims under both the non-compete covenant and the DTSA. Even in states where non-compete enforcement is limited, trade secret misappropriation claims under the DTSA and state trade secret law remain fully available. Structuring the acquired company's key proprietary information as trade secrets and maintaining reasonable secrecy measures post-close preserves these parallel enforcement rights regardless of the non-compete's enforceability.

For the complete legal framework governing M&A transactions, including how non-compete and trade secret provisions fit within the deal documentation and indemnification structure, review the M&A deal structures guide and the M&A transaction services overview. For the sibling article covering WARN Act compliance obligations in the same transaction framework, see the WARN Act notice guide.

Structuring Non-Compete and Non-Solicit Provisions for an Acquisition?

Acquisition Stars works with buyers and sellers on non-compete covenant drafting, state-law enforceability analysis, choice of law strategy, and post-close enforcement planning. Alex Lubyansky handles each engagement directly. Submit your transaction details to begin the assessment process.

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Frequently Asked Questions

What is the difference between a sale-of-business non-compete and an employment non-compete?

A sale-of-business non-compete is given by a seller to a buyer as part of a business acquisition, supported by the purchase price. It protects the goodwill the buyer paid for by restricting the seller from immediately competing and undermining those acquired customer relationships. Courts apply a more permissive reasonableness standard to sale-of-business non-competes because the seller received substantial consideration and typically had negotiating power. An employment non-compete is given by an employee to an employer, often in a weaker negotiating position. Courts and legislatures apply strict scrutiny to employment non-competes, and several states ban them entirely, recognizing the power imbalance inherent in the employer-employee relationship.

What is the current status of the FTC's Non-Compete Rule?

The FTC's April 2024 rule that would have banned most employment non-competes remains enjoined by federal court order as of April 2026. The U.S. District Court for the Northern District of Texas blocked the rule nationwide in August 2024, holding the FTC exceeded its statutory authority. Employment non-competes continue to be governed by state law. The rule's sale-of-business exception, which would have preserved M&A non-competes in genuine business sale transactions, has not taken effect. Buyers and sellers should monitor litigation developments and work with current counsel on the applicable state law framework.

Does California allow non-competes in business sale transactions?

Yes, with conditions. California Business and Professions Code section 16600 broadly voids employment non-competes, but section 16601 expressly preserves non-competes entered in connection with the sale of goodwill, all shares, or all ownership interests in a business entity. The seller must hold a substantial ownership interest in the business. The covenant must be reasonably scoped to the business sold and the territory where it operated. California courts apply reasonableness review to section 16601 covenants. California's 2024 statutory amendment also clarifies that California courts will apply California law to employment non-competes regardless of a choice-of-law clause selecting another state, so employment non-competes for California-based employees remain subject to California law.

Which states have banned or severely restricted employment non-competes?

California, Minnesota (effective July 1, 2023), Oklahoma, and North Dakota effectively ban employment non-competes. Colorado, Illinois, and Washington allow them only above income thresholds with additional conditions. Massachusetts requires garden leave pay and caps duration at 12 months. Florida's statutory framework favors enforcement; Texas applies reasonableness review under its Covenants Not to Compete Act. Most other states apply common-law reasonableness review. Sale-of-business exceptions exist in most states, meaning M&A non-competes in APA transactions are treated more favorably than employment non-competes in nearly all jurisdictions.

What is a non-solicitation agreement and how does it differ from a non-compete?

A non-solicitation agreement restricts specific targeted conduct rather than broadly prohibiting competition. Customer non-solicits restrict soliciting the acquired business's existing customers. Employee non-solicits restrict recruiting or hiring the acquired business's employees. Non-solicits are generally viewed more favorably by courts than broad non-competes because they protect defined specific relationships rather than all competitive activity. However, states that broadly restrict non-competes increasingly apply similar analysis to non-solicits that effectively prevent the seller from practicing their profession. In M&A, both customer and employee non-solicits appear in APAs to protect the goodwill and workforce the buyer acquires.

How is geographic and temporal reasonableness analyzed in non-compete enforcement?

Geographic scope must correspond to the area where the sold business had customers and competitive presence. Temporal duration for sale-of-business covenants commonly runs two to five years, with the specific period tied to the business's customer relationship cycles and the consideration paid. Courts apply a more permissive reasonableness standard to sale-of-business covenants than to employment covenants: nationwide restrictions are enforceable for businesses with national customer relationships, and five-year restrictions are more readily enforced in sale-of-business contexts than in employment contexts. Restrictions that sweep in territory where the seller had no customers, or durations that extend well beyond industry norms without specific justification, risk partial or total invalidation.

What is blue-penciling and how does it affect non-compete enforcement?

Blue-penciling allows a court to strike overbroad language from a non-compete while enforcing the remaining valid restrictions. Reformation goes further, allowing courts to rewrite the covenant to impose reasonable terms. Some jurisdictions, including California for employment non-competes, apply strict invalidity: an overbroad covenant is void entirely rather than modified. The practical implication for APA drafting is that non-competes in red-pencil or strict-invalidity jurisdictions must be carefully calibrated to avoid any overbroad provision, because a single overbroad element could invalidate the entire covenant. Including separate covenant provisions for different restriction types (geographic non-compete, customer non-solicit, employee non-solicit), each with its own severability language, reduces the risk that invalidity of one element destroys the others.

What consideration is required for a valid non-compete in M&A?

In sale-of-business transactions, the purchase price paid for the business constitutes valid consideration for the seller's non-compete. Courts uniformly hold that a seller who receives a substantial purchase price for a business has given adequate consideration for a reasonable covenant. No separate payment is required specifically for the non-compete, though some APAs allocate a portion of the purchase price to the covenant for tax purposes. In employment contexts, fresh consideration (a raise, bonus, promotion, or other benefit beyond continued employment) is required in many states for non-competes added after the employment relationship begins. When a seller continues as a post-close employee, the APA non-compete is supported by the purchase price, but any separate employment non-compete should also be independently supported by employment-context consideration.

Employment Law in M&A: Related Guides

Non-compete and non-solicit covenants are one component of the broader employment law framework in M&A transactions. Review the related guides for a complete picture.

Employment Law in M&A: A Legal Guide for Buyers, Sellers, and Key Employees WARN Act Notice in M&A Transactions: Federal and State Compliance Asset Purchase vs Stock Purchase Indemnification Provisions in M&A M&A Deal Structures M&A Transaction Legal Services