We have heard the same story a million times. A humble engineer quits their job at a big tech firm and creates their own startup. The startup grows fast, eventually becoming so efficient and innovative that it competes with the same big tech company that once paid the engineer’s wages. It is a rags-to-riches story we can all get behind, one that typifies the American dream. But is it legal? What if the engineer was bound by a non-compete clause in their employment contract? What if that engineer decided to violate the non-compete agreement? What are the legal implications of such a move? Can big tech companies really prevent talented entrepreneurs from competing? These are questions you might want to explore with an experienced technology lawyer in the United States, especially if you are one of these engineers.

Major Tech Company Sues Engineers Who Started Rival AI Startup

On October 30th, 2025, Reuters reported that a major American tech company had decided to sue two of its former software engineers. The pair left their former employer a few months apart before launching a new AI company together. Their former employer, a household name in the world of big tech, claims that this “copycat firm” represents a blatant violation of their respective non-compete agreements.

In its lawsuit, the company alleges that it provided the two engineers with trade secrets and intellectual property, including source code and customer data. The company contends that the pair then used this proprietary and sensitive data to unfairly launch their own company as a direct competitor to their former employer. Specifically, the plaintiff alleges that the two engineers are targeting exactly the same customers with exactly the same services.

The new startup itself is not named as a defendant. However, the two engineers now face legal challenges as they attempt to build their new company. Reuters reports that half of their startup’s employees also recently left the same big tech company. The implication is that the new startup heavily “poached” employees from the tech company to launch their operations. Whether these allegations are true or not is unclear.

The key question is whether the former employees actually agreed not to compete with their former employer. The big tech company alleges that they made this agreement when they signed the employment contracts. They claim the evidence is clear as day, in black and white. Specifically, the company states that the employees should have waited at least two years before launching the new startup. This was the required non-compete period outlined in their employment contracts.

Are Non-Compete Clauses Enforceable in the United States?

The Federal Trade Commission (FTC) tried to ban all non-compete clauses in 2024, even going so far as to announce that this practice was illegal. However, the FTC abandoned all attempts to uphold this ban by September of 2024. Multiple states had successfully challenged the ban at this point, and the attempt ended in failure.

That said, the fact that the FTC is actively trying to ban non-compete clauses is a positive sign for many entrepreneurs in the United States. This might be particularly positive news for those who plan to “jump ship” and launch competing AI startups within the next few years. Although the FTC has admitted defeat for the time being, the organization is obviously critical of the practice of non-compete clauses.

Other organizations in the United States feel the same way. One example is the National Labor Relations Board, although recent changes within the leadership of that organization could drastically change its stance on the subject.

Of course, the United States is a collection of separate jurisdictions, and each of these jurisdictions approaches non-compete clauses in different ways. The aforementioned lawsuit involving the two engineers occurred in New York, a jurisdiction that is generally reluctant to enforce non-compete clauses. However, the practice is certainly legal in the Empire State, and the same is true in many other jurisdictions. Some states have outright banned non-compete clauses. According to the Economic Innovation Group (EIG), these four states include California, North Dakota, Minnesota, and Oklahoma.

The Downsides of Non-Compete Clauses

The problem with non-compete clauses is that they fall under contract law. If no one coerced or tricked you into an employment contract, the obvious argument is that you only have yourself to blame. Maybe you desperately needed the job. Perhaps you didn’t bother to read the contract because you were so enthusiastic about the position. Whatever the case may be, it can be difficult to wriggle your way out of a non-compete clause. After all, no one forced you to sign the contract.

On the other hand, many criticisms of non-compete clauses are legitimate. The EIG notes that non-compete clauses can erode the freedoms of average Americans. Non-compete clauses prevent talented entrepreneurs from exploring innovative new ideas. They can also prevent workers from moving from position to position. One might argue that this goes against the principles of a free market. You could also make the argument that non-compete clauses represent a form of monopolization.

The enforceability of none-compete clauses can vary widely based on many factors including the jurisdiction, the practice in that industry, what level of specialized training the person received from the employer and what was their level of exposure when they joined the employer. This is definitely not a one-size fits all sort of question. It’s very important to understand these factors both when you construct a non-compete, as an employer; and when you are the ex-employee considering its impact on your future activities.

If you are an entrepreneur who is trying to launch an AI startup, you should know that there are ways to circumvent non-compete clauses. Perhaps the most obvious option is to negotiate with your employer and ask for a waiver.

How Can a Technology Lawyer in the United States Help With My AI Startup?

Artificial intelligence presents many new legal questions, many of which have yet to be answered. However, non-compete clauses are nothing new, and a technology lawyer in the United States can help you navigate this issue. If you’re trying to launch an AI startup after recently leaving your employer, consider speaking with a lawyer to discuss this issue. Perhaps you are concerned about a non-compete clause in your employment contract, and you would like to learn more about the penalties you might face if you violate this clause. Maybe you are wondering whether the clause is even legally enforceable. Perhaps you have already violated the clause, and you need legal guidance. Whatever the case may be, you can continue this conversation with John P. O’Brien today.