California has a long history of prohibiting employee “non-compete” agreements. While common to see in other states, California’s opposite approach goes back generations. And, in the beginning of 2024, California passed Senate Bill 699 (”SB699”) and Assembly Bill 1076 (“AB1076”) which were intended to solidify California’s commitment to protecting employee mobility rights. The federal government has since taken its own steps to follow suit, by expanding the Federal Trade Commission’s prohibition on “non-compete” agreements in employer-employee relationships. The FTC issued a final rule on this in April of 2024. The FTC’s rule preempts any inconsistent state laws. Other states must now follow the FTC rule and the precedent set long ago by California.
Generally, the Federal Trade Commission Act prohibits unfair methods of competition. It declares any unfair or deceptive acts or practices in or affecting commerce unlawful. The new rule, issued in April, expands application of the prohibition on unfair competition to “non-competes” in employer-employee relations. Specifically, the FTC has ruled that all “non-competes” are an unfair method of competition. Therefore, under federal law, there is a ban on non-competes for employees. The rule also invalidates previously entered “non-compete” agreements. Across the country, employers must now also provide notices to employees explaining they are no longer bound by any pre-existing “non-compete” agreements.
The Commission defines “non-compete clauses” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Under federal law, there is a small carve-out for current employees who are senior executives earning more than $151,164 annually and who are in policy making roles. But employers are still banned from entering into “non-competes” with any new employees, including senior executives. Interestingly, the FTC did not make exceptions for any specific industry nor limited the senior executive exemption to any specific industry. And this carve-out does not invalidate California’s separate prohibition and thus cannot be relied upon by California employers.
Why did the FTC take this action?
In explaining its decision, the FTC explained that “non-competes” are more harmful to employees than employers, because employers have alternatives to protecting their interests. The FTC pointed to trade secret laws that protect confidential information and the ability to prohibit employees from misappropriating such proprietary information – even at a new place of employment. The FTC also explained that narrowly-tailored non-disclosure agreements remain potentially lawful and can be used to protect employers’ interests.
Projected Effects of the National Ban on Non-Competes
The FTC estimated that on a national basis, one in five employees were subject to a “non-compete.” This equates to some 30 million workers. The FTC emphasized its research indicates the new national ban lead to 2.7% of annual new business formation growth, and thousands of new businesses being started each year. The FTC also anticipates the new rule will increase wages nationwide by $524 per year, and drive innovation. The rule is expected to increase the number of patents issued by 29,000 per year for the next ten years.
What does this mean for California businesses and California business owners?
Now is the time for California business owners to carefully evaluate their company’s most valuable intellectual assets and determine the best ways to protect them, without relying on “non-compete” agreements. If a California-based employer has existing non-disclosure agreements, it may be wise to review and update them with language that offers additional protection, and to avoid concern about violating the new FTC rule or existing California law. Even businesses whose employees are subject to trade secret laws should consider implementing non-disclosure agreements that clearly outline which trade secrets must not be disclosed.
DDWK’s employment attorneys are available to review existing employee contracts, and your trade secret portfolio and related policies, and evaluate whether your business is in compliance with California and federal law in this important area of employment law.
Julia Jiang-Yu, Esq., is an attorney with the law firm of Dunn DeSantis Walt & Kendrick. Julia’s practice is focused on the representation of businesses and business owners with a focus on employment law.
Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies.
You can find additional information and resources related to helping business owners and their businesses on the DDWK website.
