California to Invalidate Out of State Non-Compete Agreements

A new California law (Senate Bill 699) expands a prohibition on non-compete agreements beyond state lines.

Current law (Business and Professions Code Section 16600), provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions (e.g., when a person sells the goodwill of a business or ownership interest). 

SB 699, which adds section 16600.5 to the Business and Professions Code, expands this prohibition to any non-compete provisions regardless of where and when the contract was signed. This means that out-of-state employers cannot enforce non-compete contracts in California, even though they were lawfully entered into in a different jurisdiction. This also manifests in the state legislature’s declaration regarding the basis for SB 699:  

California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence. This freedom of employment is paramount to competitive business interests.

As further deterrence against non-compete restrictions, SB 699 provides that current, former, or prospective employees have:

• A private right of action for injunctive relief, and/or
• Recovery of actual damages, and a
• Right to recover reasonable attorney’s fees and costs if the employee prevails.

Non-compete restrictions are not limited to California. Recently, the Federal Trade Commission proposed a rule seeking to ban non-compete agreements throughout the United States.

The FTC’s proposed rule would make it illegal for an employer to enter into or attempt to enter into:

• A non-compete with a worker;
• Maintain a noncompete with a worker; or
• Represent that the worker is subject to a noncompete.

This proposed rule would apply to all workers and require employers to (1) rescind existing non-compete agreements and (2) actively inform workers they are no longer in effect. While the FTC originally held an open comment period through April 19, 2023, it postponed the final vote until April 2024.

Tal Burnovski Yeyni and Joshua S. Stein are employment defense attorneys.