What Does the FTC Ban on Noncompetes Mean for California Businesses?
On April 23, 2024, the U.S. Federal Trade Commission voted on a rule banning most noncompete clauses in employer-employee contracts. The ban was slated to go into effect on September 4, 2024, but it was blocked on August 20 in federal court, a block that is currently on appeal.
Despite this block, we have been getting questions from clients about how the ban might impact our clients should it go into effect. We wanted to provide some context and clarity around this issue.
What is a noncompete?
Simply put, a noncompete agreement, in the context of the new FTC rule, is an employment agreement that prevents an employee from working for a competitor or starting a competing business after leaving their current job. They are often designed to protect trade secrets or proprietary business information from being used by employees to the detriment of their former employer.
For many states that allow noncompetes, the FTC ban will require them to change how they use them, especially in their employment agreements. However, because of how California views noncompetes, our clients may find they are already compliant.
How California views noncompete agreements
California is an employee-friendly state that has always disliked noncompetes. Historically, most noncompete clauses have been void in California since 1872, and there were strict restrictions on when noncompete agreements could be enforced. New California noncompete laws (AB-1076 and SB-699) were enacted on January 1, 2024, further limiting the scope of noncompete contracts in California.
AB-1076 made including noncompete clauses in employment contracts or requiring an employee to participate in a noncompete unlawful unless certain exceptions were met. It also required California employers to notify their employees who are party to unlawful noncompetes that those agreements are void as of February 2024.
SB-699 made most noncompetes unenforceable in California, regardless of where the contract was signed.
Both of these laws ultimately strengthened California's stance against noncompetes. But California doesn't eliminate them. California still allows noncompetes in certain Mergers and Acquisitions transactions (i.e., sale-of-business exception).
FTC vs California
The FTC rules against noncompetes is generally narrower in scope than California’s rules. For example, the FTC’s ban on noncompete does not apply to high-level executives while California does. FTC rule further allows noncompetes to apply to sellers in any sale-of-business transaction while California requires such sale-of-business to include the sale of goodwill, full ownership interest of the business, or substantially all of the business assets and goodwill in order for the noncompete to be enforceable; moreover, said noncompete must be limited in geographical area and scope of activity.
If you are a business in California, and you’re complying with the current states rules on noncompetes, then you are likely complying with the FTC ban, should it take effect.
At Parsus Law, our services go far beyond the scope of a traditional corporate law firm. With our wide range of experience and passions, our team is equipped to support your business in all aspects of corporate law, including mergers and acquisitions. Contact Parsus Law today for a confidential consultation and to learn more.