What Does the Federal Ban on Non-Compete Clauses Even Mean in California?

On March 6, the Federal Trade Commission extended the comment period for its proposed non-compete regulations. The comment period was originally to end on March 20, but will now run to April 19, 2023. With non-competes in the headlines this year, we’ve been hearing some questions from our clients. So, we’re sharing some information about non-competes in California and the proposed federal ban on non-competes in this article.   

Non-Competes are Already Not Enforceable in California 

Non-competes are essentially unenforceable in California – and they have been for some time.  

In March last year, the California AG published a press release which outlined:  

“Despite being prohibited in California, noncompete provisions are routinely included in employee contracts, including contracts for lower-wage workers….” said Attorney General Bonta. “As our economy recovers, it is more important than ever for employers and workers in our state to have a system that protects competition in the labor market. Today’s alert is a reminder that noncompete agreements have no place in California.”  

What Impact Will the FTC Ban on Non-Competes Have in California? 

As with any law, any federal law will supersede state laws. If the federal laws are stricter than California’s laws (in any respect), then the federal law will apply. If it’s less strict (but does not contradict the California law), then the California law will apply.  

The Law in California 

California’s non-compete ban is based on Section 16600 of the Business and Professions Code, which states that contracts restraining the right to engage in a lawful profession, trade, or business are void. California courts have interpreted this as meaning that non-compete clauses are generally unenforceable.  

 This means that the federal law will generally apply, since it will be set out in legislation – not case law.  

Let’s delve into some of the proposed changes (that would only come into effect if the FTC’s regulations don’t change substantially following the comment period): 

Federal Requirement: Rescission Requirement 

The federal law would require employers to rescind non-compete clauses. This would be new if it were introduced in California.  

Notice of Rescission 

The proposed federal law would also require employers to provide notice to workers that the non-compete they agreed to is no longer in effect and may not be enforced against the worker.   

Federal Exception: Sale of a Business 

California courts have enforced non-compete agreements in certain contexts, including where partners have left an LLC or following the sale of a business or business assets, like goodwill.  

The proposed federal law notes that it intends to include a similar, although more restrictive, exemption to the general non-compete ban.  

The proposed federal exception only applies to non-compete clauses in connection with the sale of a business by a seller who holds at least a 25% ownership interest in the business and is also selling all of their ownership interests, or all or substantially all of the business’s assets.  

The California exception does not have a 25% ownership threshold for a seller to qualify for the exception.  Further, the California exception that allows for a non-compete covenant in the context of a dissolution of a partnership or LLC, or the disassociation of a partner or termination of a membership interest in an LLC, is not reflected in the proposed Federal exception. 

How Can Businesses Protect Trade Secrets and Confidential Information? 

We discussed how businesses can protect trade secrets and confidential information through employment contracts in an earlier blog post.  

If you need assistance navigating non-competes in your employment contracts, reach out. Our employment team would love to help.  

• Employment Law