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Overview

Event: Noncompetes and Restrictive Covenants: What Every Financial Advisor Needs to Know
Date: November 12, 2025
Host: Tom Dickson, Financial Experts Network
Guest Speaker: Isaac Mamaysky, Partner at Potomac Law Group and Co-Founder of a New York–based asset management firm 

This session explored the current and evolving landscape of noncompetes and restrictive covenants, their enforceability across states, and the legal nuances affecting financial advisors who change firms, sell practices, or hire employees. Mamaysky provided actionable strategies to navigate these contracts and highlighted state-level reforms, including Minnesota’s landmark 2024 law that voided noncompetes.

The Story: A “Lift-Out” Case Study

Isaac opened with a case involving a financial advisor seeking to sell his practice and join a new firm. Upon review, the advisor’s employment agreement contained a noncompete clause prohibiting him from working for any competing business — even without soliciting clients

However, because his contract was governed by Minnesota law, Mamaysky discovered that in 2024, Minnesota had banned noncompetes both prospectively and retroactively, with limited exceptions. This rendered the advisor’s noncompete unenforceable, allowing a “clean lift-out” of his practice.

Minnesota’s stance reflects a national trend toward restricting or eliminating noncompetes, a trend that is being echoed in states like California, Oklahoma, North Dakota, and Colorado.

What Are Restrictive Covenants?

Mamaysky defined restrictive covenants as contractual clauses that limit what an employee or contractor can do after employment ends. These provisions extend the employee’s fiduciary duty of loyalty beyond their tenure.

Common Types of Restrictive Covenants

Example:

If a client contacts an advisor who left a firm under a non-solicitation clause, that is generally not a violation — unless the advisor’s prior communications hinted at solicitation (“wink, wink” scenarios). However, under a no-service clause, even voluntary client contact would violate the restriction

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Legal Framework for Noncompetes

1. Traditional Common Law Standards

Historically, courts upheld noncompetes if they met three key conditions:

1. Duration: Typically limited to 1–2 years for employees; up to 5 years for business sales.
2. Geographic Scope: Must be limited to specific regions or client markets (e.g., “within 50 miles of the former office”).
3. Protectable Employer Interest: The restriction must serve a legitimate business interest such as:
   • Protecting customer relationships
   • Safeguarding proprietary information
   • Preserving the employer’s investment in employee branding and reputation

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Overly broad noncompetes — such as those “worldwide and perpetual” — are routinely struck down as unreasonable restraints of trade.

2. Modern Criticisms and Legislative Shifts

Mamaysky summarized the growing opposition to noncompetes, citing several policy-based criticisms:

• Reduced employee mobility and wages due to diminished bargaining power.
• Stifled innovation and entrepreneurship, as employees cannot easily launch new ventures.
• Imbalanced power dynamics, since employees often sign contracts without legal review.
• Employee lock-in, forcing individuals to remain in toxic or unproductive environments

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These concerns have driven legislative reforms and regulatory crackdowns at both the state and federal levels.

The FTC Rule and Federal Developments

In 2024, the Federal Trade Commission (FTC) adopted a final rule banning most noncompetes nationwide, asserting they were unfair methods of competition under the FTC Act. However:

• A federal court stayed the rule in mid-2024.
• The Trump administration (2025) announced it would not appeal the ruling, effectively pausing the nationwide ban.

Despite this, the FTC continues to invalidate noncompetes on a case-by-case basis, especially where they restrict worker mobility or violate antitrust principles.

For instance, Mamaysky cited an FTC case where 1,800 employee noncompetes were voided at one company because they restricted workers’ ability to change jobs or start competing businesses

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State-Level Actions: Minnesota and Beyond

• Minnesota (2024): Enacted one of the strictest bans on noncompetes, retroactively voiding existing agreements except in limited cases.
• California, Oklahoma, North Dakota: Long-standing bans on employee noncompetes.
• Colorado and Illinois: Allow noncompetes only for highly compensated employees (typically over $100,000–$150,000 annually).
• New York: Proposed but delayed a noncompete ban in 2025 due to legislative revisions.

Each state’s stance underscores the importance of contract “choice of law” provisions, which determine which state’s law governs enforcement.

The Sale-of-Business Exception

Even in jurisdictions banning noncompetes, nearly all laws preserve a carve-out for business sales.

In this context, a seller can agree not to compete with the buyer for a limited period, protecting the buyer’s goodwill and investment:

“It’s fair for a buyer who pays millions for your practice to expect that you won’t immediately take those same clients elsewhere,” Mamaysky explained

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This exception remains critical in RIA mergers and acquisitions, where noncompetes of 3–5 years are standard.

Garden Leave Provisions

As an alternative to noncompetes, garden leave clauses are gaining traction.

• The employee remains technically employed and paid, but is relieved of all duties and barred from competing during a defined period.
• Because they maintain employment (and thus their fiduciary duty), courts are more likely to uphold garden leaves as lawful.
• These are increasingly used in financial services to manage sensitive transitions without violating state bans

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Key Legal and Practical Insights

1. Independent Contractors vs. Employees

• Noncompetes are more commonly applied to employees.
• Applying them to independent contractors risks misclassification (potential back taxes and penalties).
• Courts expect contractors to remain “free agents,” so restrictive covenants must be narrowly drafted.

2. Liquidated Damages Clauses

• Courts enforce them only if they approximate real damages, not as penalties.
• Reasonable measures may include a multiple of annual fees or the fair market value of lost clients.
• Mamaysky also noted a growing use of “buyback clauses”, allowing advisors to pay a set price to retain clients after departure

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3. No-Service and Non-Acceptance Clauses

• Often treated as equivalent.
• Enforceability depends on state law — some view them as noncompetes, others as narrower limitations.
• Mamaysky referenced a forthcoming blog article analyzing their legality across states.

Best Practices for Financial Advisors

1. Always review contracts with counsel before signing or selling a business.
2. Negotiate carve-outs in business-sale agreements for permissible future work.
3. Verify state-specific rules — even identical contract language can have different outcomes in Minnesota vs. Texas.
4. Use neutral announcements (e.g., on LinkedIn) when switching firms to avoid claims of solicitation.
5. Avoid overbroad geographic clauses; reasonable limits often mirror the firm’s actual client footprint.
6. Document communications during transitions to refute wrongful solicitation claims.

Action Items

• Research noncompete and restrictive covenant laws in your specific state.
• When selling a firm, negotiate addendums that define permitted post-sale activities.
• Review all current employment or contractor agreements for non-solicit, confidentiality, and no-service provisions.
• Contact Isaac Mamaysky for legal insights or to join his mailing list for updates: https://www.potomaclaw.com/attorneys/isaac-mamaysky.
• Follow his legal blog for upcoming posts on no-service and buyback clauses.

Key Takeaways

• Noncompetes are increasingly unenforceable in many jurisdictions, but non-solicit and confidentiality clauses remain valid.
• The sale-of-business exception continues to protect buyers and investors in practice sales.
• Garden leave and reasonable carve-outs are effective alternatives to traditional noncompetes.
• Advisors should treat restrictive covenants as living documents, revisited during every career or ownership transition.