California Gives Teeth to Its Long-Standing Noncompete Ban

California has disfavored noncompete agreements in the employment law context for more than 150 years. Before 2024, this simply meant that noncompete agreements were void. There were no financial penalties or damage remedies when employers violated the law. Companies routinely used “illegal” noncompetes to scare employees into staying.

However, two laws that went into effect on January 1, 2024, give teeth to California’s noncompete ban — and sharp ones at that. Assembly Bill (AB) 1076 provides for Attorney General enforcement of the ban, and Senate Bill (SB) 699 gives employees a private right of action against employers who try to enforce noncompetes. SB 699 also protects employees who work remotely by expanding the ban’s jurisdictional scope.

California’s View: Noncompetes Equal Unfair Competition

Noncompetes are a type of restrictive covenant, meaning they restrict an employee’s work options after they leave their employer. Typically, they involve a promise not to work for a competitor or start a business that competes with the employer during the term of the agreement.

However, it’s questionable whether an employer is actually harmed when a former employee simply goes to work for a competitor — particularly an employee below the executive level. Because of this, the California legislature and courts view employment noncompete agreements as unfair competition.

In 1872, California passed what was then § 1673 of the California Civil Code as part of a sweeping effort to codify the state’s common law. At the time, common law allowed employers to enforce “reasonable” restrictions on an employee’s future work. The California legislature deliberately created a near-absolute ban to prevent companies from suppressing wages. The goal was to ensure that workers could freely change jobs and boost economic growth.

§ 1673 formed the bedrock of California’s anti-noncompete policy. In 1941, it became what is known today as Business and Professions Code § 16600.

Giving an Old Law New Teeth

Before 2024, § 16600 stated simply that, with limited exceptions, contracts that restrain a person from work were void. As of January 1, 2024, however, AB 1076 and SB 699 create serious consequences for employers attempting to enforce noncompetes against California employees.

AB 1076: The Noncompete Notice Law

AB 1076 adds § 16600.1, which makes noncompetes expressly unlawful in the employment context. It also mandates that employers notify California employees that their noncompetes are void. It applies to both current and former employees hired after January 1, 2022.

Violations of § 16600.1 are deemed acts of unfair competition under Chapter 5 of the California Business and Professions Code, which provides for a civil penalty of up to $2,500 per violation. A “violation” is typically counted per affected employee. For an enterprise with thousands of workers, an uncorrected noncompete policy can trigger millions of dollars in fines.

SB 699: The Extraterritorial Ban and Private Right of Action Law

SB 699 adds § 16600.5, which makes it a civil violation for any employer to attempt to enter into or enforce a noncompete against a current, former, or prospective California employee. It applies “regardless of where and when the contract was signed” and “regardless of whether the contract was signed and the employment was maintained outside of California.”

Furthermore, § 16600.5 provides for a private right of action. Employees can sue for injunctive relief, actual damages, and attorneys' fees. It also includes a one-way fee-shifting provision that exclusively protects the worker. If the employee prevails, the employer must pay the employee’s reasonable attorneys’ fees and costs. If the employer wins, they cannot recover legal fees from the employee.

§ 16600.5 operates retroactively regarding attempted enforcement. However, an employer cannot be held liable simply for the historical act of making an employee sign a noncompete.

AB 692: Closing the TRAP Loophole

To bypass the noncompete ban, many companies turned to Training Repayment Agreement Provisions (TRAPs). TRAPs legally forced employees to pay back thousands of dollars in training costs if they quit.

California effectively closed this loophole with ⁠AB 692. Codified as § 16608, it strictly bans most stay-or-pay provisions. Employers can no longer use debt as a proxy tool to trap a worker in their job.

California Fills a Void Left by Federal Law

In April 2024, the Federal Trade Commission (FTC) announced a final rule banning noncompetes for all workers, with an exception for certain senior executives. It was intended to go into effect on September 4, 2024. However, on August 20, 2024, a federal judge in Texas set aside the final rule, holding that the FTC had overstepped its authority in issuing the noncompete ban. Following a change in administration, the agency voted 3–1 to abandon its legal appeals, permanently burying the blanket rule.

Instead of trying to enforce a one-size-fits-all rule, the FTC is using Section 5 of the FTC Act, which bans “unfair methods of competition.” The agency is suing or negotiating consent decrees with businesses that use overbroad agreements, particularly those harming low-wage or frontline workers.

Employers that enforce blanket, company-wide noncompetes for regular workers risk an FTC investigation. Meanwhile, the real legal battlegrounds have reverted to strict state laws such as California’s.

Major Case Exposes a Jurisdictional Loophole

While AB 1076 and SB 699 established the framework, the fallout is now hitting the courts. The ⁠California Labor Commissioner’s Office reported a 300% spike in worker complaints regarding illegal noncompetes.

Employees are actively filing preemptive lawsuits against employers just for including a noncompete in an onboarding packet. Because the law awards attorneys' fees to successful employees, law firms are treating these as high-stakes civil violations.

However, in DraftKings Inc. v. Hermalyn (2024), the First Circuit ruled that California’s noncompete ban does not automatically protect an employee who abruptly moves to California to escape an out-of-state contract. Michael Hermalyn lived in New Jersey and worked for Boston-based sports-betting giant DraftKings. He signed a noncompete expressly governed by Massachusetts law.

Hermalyn accepted a job with California-based rival Fanatics and established residency in Los Angeles two days before resigning from DraftKings. He immediately filed suit in California state court to try to void his noncompete. DraftKings countersued in Massachusetts federal court to enforce the one-year agreement. The First Circuit sided with DraftKings, ruling that Massachusetts had a stronger legal interest in the contract.

Strategic Tactics Beyond Noncompetes

Notwithstanding the jurisdictional battle in DraftKings, employers recognize that noncompete bans are becoming the new normal nationwide. They are turning to alternative legal frameworks to prevent departing employees from damaging their business interests. However, California’s views on these tactics are mixed.

California treats non-solicitation agreements as backdoor restrictions on trade that violate § 16600. The California Supreme Court ruled that customer non-solicitation clauses are void. California courts increasingly strike down employee non-solicitation agreements as well.

The Golden State views its Uniform Trade Secrets Act (UTSA) as more equitable. The UTSA balances a worker’s right to change jobs with an employer’s right to protect intellectual property. However, employers cannot restrict competition under the guise of protecting trade secrets. Instead, companies must sue under the UTSA after alleging actual misappropriation of a bona fide trade secret.

California recognizes the common law duty of loyalty as equitable but enforces it only while the employee is actively on the payroll. When the employment relationship ends, the common law duty of loyalty evaporates. A former employee owes no residual common law duty to protect their ex-employer.

Today’s New Noncompete Laws, Tomorrow’s Lawyers

Future lawyers and business professionals will benefit from staying up to date on the laws regarding noncompete clauses, not only in California but around the country. If you're interested in becoming a practicing attorney, Purdue Global Law School offers an online Juris Doctor program. Graduates of the JD program are academically eligible upon graduation to sit for the California or Connecticut bar or, with an approved petition, the Indiana bar.

If you're interested in learning more about business and employment law but do not wish to become a practicing attorney, Purdue Global Law School also offers an online Executive Juris Doctor program. Single law courses are also available.

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