Non-Compete Agreements After the FTC Rule Litigation: What Texas Startups Can Enforce

The FTC's 2024 Non-Compete Rule: Enjoined but Not Gone

For about four months in 2024, employers across the country braced for what would have been the most sweeping federal restriction on non-compete agreements in American history. The FTC published its Non-Compete Clause Rule in April 2024, with an effective date of September 4, 2024 — a near-total ban covering virtually all workers, from minimum-wage employees to senior executives. It never took effect. A federal judge in Dallas struck it down just before it was set to go live, and the rule has since been formally erased from the books. But the story behind how it died, and what replaced it, shapes how employers — including Texas startups — should think about non-competes today.

On August 20, 2024, Judge Ada Brown of the Northern District of Texas entered final judgment in Ryan LLC v. FTC, setting aside the rule with nationwide effect. The court held the rule unlawful on two independent grounds: first, the FTC lacked substantive rulemaking authority under the FTC Act to issue a rule of this kind; second, even if the agency had that power, the blanket ban was unreasonably overbroad and therefore arbitrary and capricious under the Administrative Procedure Act. Either ground alone was fatal to the rule. Together, they left no viable path to resurrection through technical revision.

The FTC appealed to the Fifth Circuit, but that appeal was short-lived. On September 5, 2025, the Commission voted 3-1 along party lines to dismiss the appeal and formally abandon the rule. Chairman Ferguson stated publicly that the rule's illegality was "patently obvious." The Federal Register completed the cleanup in February 2026, when the rule was formally removed from the Code of Federal Regulations. The Non-Compete Clause Rule no longer exists as a legal instrument.

That does not mean the FTC has walked away from the space entirely. The agency's Bureau of Competition has signaled that the Commission will pursue antitrust enforcement under Section 5 of the FTC Act — the unfair methods of competition authority — against non-compete arrangements it views as egregious. This is a narrower, case-by-case tool rather than a categorical prohibition, and it applies most plausibly to dominant-employer markets where widespread non-compete use has a demonstrable effect on labor mobility. For the typical startup, the operative question is not federal law: it is what Texas allows.

Texas Covenants Not to Compete Act: What Makes One Enforceable

With no federal rule in play, Texas non-competes live entirely under state law — specifically the Texas Covenants Not to Compete Act, codified at Tex. Bus. & Com. Code §§ 15.50–15.52. The statute sets out three core requirements: the agreement must be ancillary to or part of an otherwise enforceable agreement, it must contain limitations as to time, geographic area, and scope of activity, and those limitations must be reasonable and impose no greater restraint than necessary to protect a legitimate business interest. Miss any one of them and a Texas court will reform or void the clause — not enforce it as written.

The Ancillary Requirement — and How Marsh Changed It

For nearly two decades after Light v. Centel Cellular Co., 883 S.W.2d 642 (Tex. 1994), Texas courts applied a strict two-part test: the non-compete had to be ancillary to an otherwise enforceable agreement, and the consideration had to give rise to the employer's interest in restraining competition. That second prong was a trap — courts routinely invalidated agreements where the promised consideration never fully materialized. The Texas Supreme Court dismantled it in Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), holding that consideration need only be "reasonably related to the interest worthy of protection," not that it actually cause the need to restrain. Marsh also confirmed that equity and stock option grants are valid consideration for a non-compete — relevant for every startup issuing option packages to early hires.

What Counts as Adequate Consideration

Texas courts recognize three categories of consideration that satisfy the ancillary requirement: access to trade secrets or confidential information, specialized training not available on the open market, and equity or stock options. For startups, the equity path is the most common — and the most litigation-prone. The grant must be real, documented, and tied explicitly to the restrictive covenant in the agreement. A vague promise of "future equity" in an offer letter, without a corresponding option agreement or grant notice, is unlikely to hold.

Reasonable Limitations: Time, Geography, and Scope

Courts apply a reasonableness standard to each dimension of the restriction. On time, one to two years is the accepted range in most Texas industries, but technology employers face a shorter window — courts have found two-year restrictions overbroad in fast-moving technical fields where knowledge depreciates quickly, and some practitioners suggest that six months may be the practical upper bound for roles tied to rapidly evolving software or platforms, though no bright-line rule exists. On geography, the restriction must track where the employee actually worked, not the full footprint of the employer's business — a drafting problem that becomes acute for remote software companies, where "where the employee worked" could mean a home office in Austin or anywhere with a laptop. Scope of activity must be tightly tied to what the employee actually did, not the company's entire line of business.

What Happens When a Non-Compete Is Overbroad

Texas does not void overbroad non-competes — it rewrites them. Under § 15.51(c) of the Covenants Not to Compete Act, a court shall reform a covenant to the extent necessary to make its limitations reasonable, then enforce the covenant as reformed. That word "shall" matters: reformation is mandatory, not discretionary.

And courts go further than merely striking objectionable language. Texas courts will affirmatively add terms that were never in the original agreement — including a geographic restriction in a covenant that contained none at all. A founder who assumes a geographically unbounded covenant will fail entirely may instead find a court-drawn territory imposed on a departing employee.

Federal courts within the Fifth Circuit have held that reformation is available — and may be required — even at the preliminary injunction stage, meaning overbreadth alone will not defeat an emergency motion to enjoin a former employee. Employers can pursue TROs and preliminary injunctions on covenants that courts have not yet finalized, and courts have demonstrated willingness to shape those covenants from near the outset of litigation.

Reformation has a hard ceiling, though. Courts correct overbreadth in the restrictions themselves — duration that runs too long, territory that sprawls too wide, scope that sweeps in too many roles. What reformation cannot fix is a fundamental failure of the ancillary-to-an-otherwise-enforceable-agreement requirement. If the covenant was never properly tied to a valid transaction (an employment offer, a sale of business, access to confidential information), there is nothing to save. The court addresses the shape of restrictions, not the absence of a legal foundation for them.

High-Risk Patterns for Startup Non-Competes

Most startup non-compete problems fall into a small set of repeating patterns. Each one is identifiable before litigation — which makes them avoidable, if you know what to look for.

NDA/Non-Compete Hybrids Without an Employment Agreement

Grafting a non-compete clause onto a standalone NDA — without a corresponding employment agreement or an identified protectable interest — is one of the most common drafting errors in early-stage companies. The ancillary requirement under Texas law means a non-compete must be part of an otherwise-enforceable agreement that gives rise to confidentiality obligations or specialized training. A mutual NDA between two parties who never formalized an employment relationship doesn't satisfy that test. The restriction fails not because it's unreasonable, but because it was never properly anchored to anything enforceable to begin with.

At-Hire Agreements Without Actual IP Delivery

An employer can recite trade secret protection in an agreement all it wants — if it never actually provides confidential information or specialized training after the employee starts, Texas courts won't enforce the restriction. At-will employment plus a signing bonus has been found insufficient consideration on its own. The question courts ask is whether the employer held up its end of the bargain that made the non-compete ancillary. If the employee handled routine work and received nothing proprietary, the recitals don't save the clause.

Geographic Scope Disconnected From the Role

Nationwide or unlimited geographic restrictions are presumptively overbroad for remote software employees. Texas courts require the geographic scope to match where the employee actually worked and had relationships. The exception — upheld in Daily Instruments Corp. v. Heidt, a federal district court decision — involved an employee with a documented global role and access to worldwide customer data. That case is the exception courts cite, not the baseline they apply. For a developer who worked on a single product team and never managed customer relationships outside one region, a nationwide restriction will not survive scrutiny as written.

Independent Contractor Non-Competes

Courts are particularly cautious with non-competes imposed on contractors who operate their own businesses. The agreement must still satisfy the ancillary requirement and identify a protectable interest — standards that are harder to meet when the relationship isn't employment. Misclassification compounds the risk: if a worker was labeled an independent contractor but functionally worked as an employee, enforcement arguments get muddied and the classification itself becomes a litigation liability.

When Overbroad Meets Vague

An overbroad agreement gets reformed by the court under § 15.51(c) — the court adds reasonable terms and may award the employer only limited relief. A vague agreement gives courts broader discretion in how they reshape it, because there's less to anchor the revision to. When a restriction is both overbroad and vague, the outcome at trial becomes genuinely unpredictable. The employer might win something, but it won't be what was drafted, and the cost of finding out is rarely worth it for a startup.

What Holds Up: Alternatives to Non-Competes

Texas founders who can't enforce a geographic non-compete — or who want protection that survives federal scrutiny — have three enforceable tools: customer non-solicitation agreements, employee non-solicitation agreements, and a trade secret stack built on the federal Defend Trade Secrets Act and Texas Uniform Trade Secrets Act. Used together, these provide meaningful protection against the scenarios that actually cause damage: a departing employee raiding your book of business, poaching your team, or taking proprietary technology to a direct competitor.

Customer Non-Solicitation

Under Marsh USA Inc. v. Cook, courts apply the same § 15.50 reasonableness standard to customer non-solicitation agreements as to geographic non-competes — but the analysis tends to run in the employer's favor when the restriction is drawn tightly. The clause must limit contact only to customers the employee personally dealt with during their tenure, not the company's entire client list. Courts also draw a line on conduct: "solicit" means an active appeal for business, not merely informing a former customer that the employee has changed jobs. Notably, the FTC's now-vacated rule expressly excluded non-solicitation provisions from its definition of a non-compete clause, confirming these clauses face lower regulatory risk even in a volatile rulemaking environment.

Employee Non-Solicitation (Anti-Raid)

Anti-raid clauses — prohibiting a departing employee from recruiting former colleagues — are enforceable when narrowly drawn to employees the departing person actually worked with or supervised. Blanket prohibitions on hiring anyone from a former employer rarely survive challenge. The practical drafting rule: name a function, a team, or a reporting relationship, not "any employee of the company."

Trade Secret Protection: DTSA and TUTSA

The Defend Trade Secrets Act (18 U.S.C. § 1836) creates a federal civil claim for trade secret misappropriation and includes an ex parte seizure mechanism for situations where a defendant is likely to destroy evidence. One important constraint: the DTSA expressly prohibits injunctions that prevent a person from entering into an employment relationship, and federal courts have largely rejected the "inevitable disclosure" doctrine under the statute. Texas fills some of that gap. Under the Texas Uniform Trade Secrets Act (Tex. Civ. Prac. & Rem. Code §§ 134A.001–134A.008), § 134A.003's injunctive relief provision has been read by some Texas courts to permit injunctions based on threatened — not yet completed — misappropriation, which overlaps with what other jurisdictions call the inevitable disclosure doctrine. Texas courts have not uniformly adopted that doctrine as a standalone theory, but TUTSA still gives employers meaningfully more injunctive leverage than DTSA when a departing employee's new role would foreseeably involve using protectable confidential information. Both statutes allow exemplary damages up to twice actual damages plus attorney fees for willful misappropriation.

AI startups in particular have moved toward a trade secret, NDA, and IP assignment stack as their primary competitive protection, given the ongoing uncertainty around non-compete enforceability. This approach — no geographic restriction, no durational cap negotiation, no § 15.50 reformability risk — protects against misappropriation without triggering the enforceability analysis courts apply to traditional covenants not to compete.

What Texas Startups Should Do Now

The FTC ban is gone, Texas rules are intact, and SB 1318's physician non-compete caps took effect September 1, 2025. That combination makes this a good moment to audit what your agreements actually say — and whether they would survive a § 15.51 enforceability challenge.

• Audit legacy agreements. Agreements predating 2011 may miss the Marsh USA consideration framework. Templates borrowed from California or other states almost certainly fail Texas's ancillary-to-agreement requirement.
• Identify the actual protectable interest for each role. If the agreement recites trade secrets or specialized training but the employer never delivered either, Texas courts will not supply a substitute — and you will carry the burden at § 15.51 to prove otherwise.
• Document at execution, not in litigation. Record specifically what confidential information or training is being conveyed when the agreement is signed. That contemporaneous record is your § 15.51 burden-of-proof position if a dispute arises.
• Default to non-solicitation and trade secret protection for new hires. Add a geographic restriction only when the role and the protectable interest actually justify it — layering in geographic scope that courts will blue-pencil down anyway weakens the agreement's overall credibility.
• Healthcare and telehealth founders: flag every physician non-compete. SB 1318 (89th Legislature, eff. Sept. 1, 2025) amends Tex. Bus. & Com. Code § 15.50(b) to cap physician non-competes at one year and a five-mile radius from the primary practice location. The same legislation adds § 15.501 extending parallel caps to dentists, nurses, and physician assistants. Agreements in that portfolio that exceed either limit are now presumptively unenforceable as written.

Restrictive covenants fail most often not because the law is hostile to them, but because the agreements were drafted generically, signed without the right consideration structure, or never tied to the specific interests they purport to protect. Getting counsel involved before new offer letters go out is far cheaper than litigating enforceability after a key employee leaves.