California Law: Noncompete Agreement Ban Takes Effect
California has disfavored noncompete clauses in the employment law context for over a century. Before 2024, all this meant was that a California employer who tried to enforce a noncompete clause against a California employee would leave court with a loss. Now though, with the January 2024 passage of two groundbreaking laws, California no longer merely disfavors noncompetes; it expressly outlaws them (with limited exceptions).
What’s more, under the new laws, California's prohibition against noncompetes now no longer stops at the state’s border; it applies to employers located anywhere in the U.S. One of the new laws also provides a cause of action against any employer that requires a noncompete. This means a losing employer could leave a California court not only with a loss but also with a judgment against it for injunctive relief, actual damages, and attorneys’ fees.
What Are Noncompete Agreements?
Noncompetes are a type of “restrictive covenant,” so called because these promises restrict an employee’s work options after they leave their employer.
Restrictive Covenants
The main types of restrictive covenants found in the employment law context are:
Noncompete – A promise not to compete against a former employer by going to work for a competitor (or by starting a business that competes with that employer)
Nonsolicitation – This can take two forms:
A promise not to solicit a former employer’s clients
A promise not to solicit a former employer’s employees (also called a “no-raid” agreement)
Nondisclosure – A promise not to use or disclose a former employer’s confidential information
California’s View — Noncompetes Equal Unfair Competition
It’s one thing to prevent an employee from actually harming a former employer by using or disclosing a former employer’s trade secrets or stealing their clients. But it’s questionable whether an employer is actually hurt when a former employee (particularly one below the executive level) simply goes to work for a competitor. Because of this, the California courts and legislature view noncompete agreements in the employment law context as unfair competition.
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AB 1076 and SB 699: New Teeth for an Old Law
California law has disfavored noncompete agreements in the employment law context since 1872 — when the legislature enacted the law that ultimately became § 16600 of the state’s Business and Professions Code (Code). Before 2024, § 16600 stated simply that, with limited exceptions, contracts that restrain a person from work were void. This meant a California employer couldn’t enforce a noncompete against a California employee.
As of January 1, 2024, however, California’s new laws — Assembly Bill (AB) 1076 and Senate Bill (SB) 699 — give teeth to § 16600, and sharp ones at that. The ban on noncompetes no longer applies only to California employers but to employers located anywhere in the U.S. seeking to stop a California employee from working in the state. And employers now face much more than just an unenforceable contract; those who run afoul of the new laws also face civil penalties as well as lawsuits that could leave them paying actual damages and attorney’s fees.
AB 1076 Makes Noncompetes Unlawful
The most significant feature of AB 1076 is its addition of § 16600.1, which provides:
Noncompetes in the employment law context are expressly unlawful.
Employers must notify California employees (and former employees) hired after January 1, 2022, that their noncompetes are void. (Employers had a deadline of February 14, 2024, to do this.)
Violations of § 16600.1 are deemed acts of unfair competition under Chapter 5 of the California Business and Professions Code, which provides for a civil penalty of up to $2,500 for each violation.
SB 699 Covers Employers Outside California and Subjects Violators to Significant Costs
SB 699 adds § 16600.5, which provides the following:
The prohibition against noncompetes protects a California resident seeking to work in the state, even if the employer is located in another state where such agreements are permitted.
It is a civil violation for any employer to require a California employee to sign a noncompete.
A California employee has a private right of action against any employer or former employer who required them to sign a noncompete, with a right to injunctive relief, actual damages, and attorney’s fees. This cause of action is retroactive, making it vital for California employers to address any noncompetes immediately.
Is a Noncompete Allowed for a California Resident Who Works Outside the Golden State?
It remains to be seen. Section 925 of the California Labor Code gives a California resident working in California the protections of California law. However, SB 699 is silent as to whether its protections apply to a California resident seeking to work in another state. This will almost surely be an issue in future litigation.
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California’s Noncompete Ban — the Strictest but Not the Only
Although California’s noncompete laws are the farthest-reaching and most severe of any in the nation, the Golden State is not the only place with a general ban on noncompetes in the employment law context. Minnesota and Oklahoma have also introduced general bans, and South Dakota has declared certain noncompetes void. In addition, the Federal Trade Commission (FTC) has introduced a rule banning noncompetes for all workers.
FTC Final Rule Set Aside by Texas Federal Judge
In April 2024, the FTC announced a final rule banning noncompetes for all workers (with an exception only for certain senior executives), which was intended to go into effect on September 4, 2024. The final rule would grandfather existing noncompetes for certain senior executives but render all other noncompete agreements unenforceable. Like the new California law, the FTC final rule would require employers to notify affected employees that their noncompetes are no longer valid.
However, on August 20, 2024, a federal judge in Texas set aside the FTC final rule, holding that the FTC had overstepped its authority in issuing the non-compete ban. The FTC has said it may appeal the ruling, but for now, the final rule will not go into effect in September. Because a federal court in Pennsylvania reached a different conclusion than the Texas court, there is now a circuit split regarding the FTC final rule, which may mean the ultimate resolution of the matter could be decided by the U.S. Supreme Court.
Today’s New Noncompete Laws, Tomorrow’s Lawyers
Future lawyers will need to be up to speed on the laws regarding restrictive covenants such as noncompete clauses, not only in California but around the United States.
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