California And FTC Non-compete Q1 2024 Round Up
By: Eric Akira Tate, Cooper J. Spinelli and Caleb D. Woods
While the FTC was relatively quiet in 2023 on the non-compete front, California forged ahead with two amendments to its non-compete statute (Business and Professions Code section 16600) that, depending on how courts interpret them, could be one of the most significant developments in the California employee-mobility space in the last 10 years. One of the amendments (SB 699) extends California’s non-compete ban to those signed by out-of-state employees under out-of-state law and creates a private right of action. The other (AB 1076) makes it “unlawful” to enter into a non-compete with an employee and required employers to notify their current and former employees by February 14, 2024, that any such non-competes are void. Each raises at least as many questions as they answer, including the effect, if any, on the Private Attorneys General Act (PAGA), employee non-solicits, and extraterritoriality. New York state, meanwhile, made news for what it did not enact—a total ban on non-competes. But although New York’s governor vetoed the total-ban bill, the New York City Council introduced a non-compete bill of its own in February 2024 that would ban all non-competes in the city without exception. Below we survey the latest on the FTC’s proposed rule, California’s new non-compete amendments, the New York state ban that was vetoed, and the proposed ban that was recently introduced in the New York City Council.
FTC UPDATE
Recent reporting indicates that while the FTC may vote on the final version of its rule as early as April 2024, for various reasons such a vote may not happen until later in the year.
Commissioner Lina Khan touched on the proposed rule on a panel at the American College of Emergency Physicians last October 2023, stating that the FTC had received far more feedback from individuals who work in healthcare than any other individual sector and an “overwhelming” number of comments supported total ban: “We’re looking at all those comments very closely and figuring out where to land,” she said. “But I’ll be honest, the overwhelming number of comments are firmly in support of the FTC proposal to ban non-competes across the board. And so, we take that very seriously.”[1]
The FTC and DOL also entered into a Memorandum of Understanding (MOU) in September 2023 in furtherance of the President’s Executive Order on Competition. According to the press release, “[t]he new agreement enables the FTC and DOL to closely collaborate by sharing information, conducting cross-training for staff at each agency, and partnering on investigative efforts within each agency’s authority.”[2] Among the areas of mutual interest for the two agencies, the MOU identifies “the imposition of one-sided and restrictive contract provisions, such as non-compete and training repayment agreement provisions.” Id.
And of course, it is unclear how the election year will affect these plans.
CALIFORNIA
Key Legislative Developments
SB 699 and AB 1076 both took effect on January 1, 2024.
SB 699
SB 699 added section 16600.5 to the California Business and Professions Code, rendering unenforceable any contract that is void under the California framework. In relevant part, the law takes California’s expansive non-compete framework and further extends it to contracts that are signed and executed under laws outside California: “An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.” Cal. Bus. & Prof. Code § 16600.5(b).
The amendment also creates a civil cause of action for any employee against an employer that enters into or attempts to enforce a contract that is void under this law, entitling such employee to injunctive relief, actual damages, or both, as well as reasonable attorneys’ fees and costs.
AB 1076
Making direct reference to Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, AB 1076 amended section 16600 of the Business and Professions Code to void the application of any non-compete agreement in any employment context regardless of how narrowly tailored it may be, unless it meets an existing exception under California state law.
It also added section 16600.1 to the California Business and Professions Code, providing that:
- It is “unlawful” to include a “noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy an exception in this chapter.”
- Employers who have non-compete clauses in contracts with current employees or former employees employed after January 1, 2022, were required to notify those employees by February 14, 2024, that the non-compete clause is void.
- A violation of this section is an act of unfair competition under California law (section 17200), allowing for the relief and penalty provided therein.
Section 16600.1 otherwise is silent on relief. Unlike SB 699, AB 1076 does not expressly authorize attorneys’ fees or actual damages.
Rejected Bill
The California legislature was considering but ultimately did not advance A.B. 747, which would have imposed, in addition to actual damages, a $5,000 penalty per employee for entering into or attempting to enforce a non-compete.
Open Questions and Considerations
Extraterritoriality
California has a general presumption against extraterritorial application of its laws that has been recognized by its Supreme Court. Sullivan v. Oracle Corp., 51 Cal. 4th 1191, 1207 (2011). SB 699 did not purport to overturn, and did not even reference, Sullivan.
SB 699 provides that “An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California.” Cal. Bus. & Prof. Code § 16600.5(b).
But language found in the preamble to SB 699 (enacting section 16600.5) suggests that the amendment was intended to protect employees who are performing work in California and thus should not be applied to employees outside California:
- “(e) The California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.”
- “(f) 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.”[3]
Thus, one question that arises is to what extent does California’s ban apply to employees who remain and work outside California and remain there?
PAGA
PAGA applies only to violations of the Labor Code. The statutes that prohibit non-competes, including the newly enacted statutes in sections 16600.1 and 16600.5, are in the Business and Professions Code, not the Labor Code.
But cases have been filed by California employees under PAGA challenging non-competition agreements purporting to rely on a catchall in the Labor Code—Labor Code section 432.5—which prohibits any employer or manager from requiring an employee or applicant for employment to agree in writing to a term or condition that know by such employer or manager to be “prohibited by law.” Cal. Labor Code § 432.5.[4]
Whether a violation of Business and Professions Code section 16600 can be pursued under PAGA and warrant penalties under Labor Code section 432.5 are additional questions that may need to be resolved.
Relief under Business and Professions Code section 17200
Business and Professions Code section 16600.2 (AB 1076) on its face limits relief to what is available under section 17200, i.e., restitution, including restoring money to any person from whom the money has been obtained through unfair competition, for any unjust enrichment of an employer, injunctive relief, and possibly attorneys’ fees (by way of California Code of Civil Procedure section 1021.5).
Courts have generally held that damages are not available under section 17200. Section 17206 does provide for a civil penalty of $2,500 per violation, but only in an action brought by a public prosecutor, such as the state attorney general, any district attorney, or certain city attorneys. Assuming a public prosecutor brought a case and was awarded civil penalties, the statute is silent on how the penalty would be assessed other than the penalty is for “each violation.”
Employee Non-Solicits and Fixed-Term Agreements
Each amendment is silent on employee non-solicits and fixed-term employment agreements.
The new statutory subdivision, as amended by AB 1076, also requires section 16600 to be “read broadly” and states that this “does not constitute a change in, but is declaratory of, existing law.” Whether courts interpret the amendments to apply to these agreements remains to be seen.
Labor Code Section 925(e)
Before enactment of SB 699, some courts had, as we reported in 2023,[5] construed California Labor Code section 925(e) as an exception of sorts to section 16600 if the employee is represented by the individual counsel of their choice. While AB 1076 expressly referred to Edwards, neither amendment mentioned Labor Code section 925 or 925(e) at all.
What, if any, effect section 16600.5’s prohibition—that “an employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed and the employment was maintained outside of California”—will have on this issue remains an open question.
[3] Emphasis added. https://leginfo.legislature.ca.gov/faces/bill.
[4] “No employer, or agent, manager, superintendent, or officer thereof, shall require any employee or applicant for employment to agree, in writing, to any term or condition which is known by such employer, or agent, manager, superintendent, or officer thereof to be prohibited by law.” Cal. Labor Code § 432.5.
[6] The New York City Council – File #: Int 0140-2024 (nyc.gov) (“The term “non-compete agreement” means an agreement between an employer and a worker that prevents, or effectively prevents, the worker from seeking or accepting work for a different employer, or from operating a business, after the worker no longer works for the employer.”).
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