On September 4th, the FTC’s Non-Compete Clause Rule was due to take effect, but a federal judge in Texas blocked it. The rule stated it was an “unfair method of competition for persons to, among other things, enter into non-compete clauses.” That same rule went on to say that non-competes signed by any worker who is not a senior executive in a policy-making position are no longer enforceable. The definition of workers covers both full and part-time employees as well as apprentices, independent contractors, interns, and volunteers.

This ruling doesn’t have any impact on preexisting laws in California about non-compete agreements. Per the California Business and Professions Code §16600, non-competes were already void and prohibited except in certain situations. We’ll explore what those exceptions are and what to do if your employer makes you sign a non-compete agreement.

The History Behind the Repeal of Non-Competes

California lawmakers have never favored non-compete agreements. Restraint of trade rules have been in place since the 1940s. The Contracts in Restraint of Trade was added to California employment laws in 1941. It’s seen several changes since then, but the heart of the law has been to protect workers from unfair non-competes and companies from loss if a business partner plans to open a competing business in the same area.

Non-competes can be detrimental to a worker, which is why they’re illegal. In 1997, a certified public accountant by the name of Raymond Edwards II was hired to work for a Los Angeles accounting firm. He was forced to sign a non-compete agreement stating that for 18 months, he would not perform professional services for any client he worked with during 18 months before termination or resignation.

When the accounting firm closed down after a federal investigation for fraud, Edwards’ job ended, but he was offered a position with HSBC, which was taking over some of the accounting firm’s accounts. However, the accounting firm wouldn’t release Edwards from the non-compete he’d signed, which cost him a job offer and severance benefits.

This matter went to court and the judge sided with Edwards as the non-compete was limiting his ability to work. That helped solidify changes to California’s non-compete laws and the FTC’s rules against non-compete agreements.

What Are the Exceptions in California?

There are exceptions to the non-compete law. Partners in a corporation or limited-liability corporation may not be allowed to form a new business in the same area if the services or products are identical to the company they left. Trade secrets have to also be protected, but a non-compete cannot keep the employee from taking a job with a competitor.

If you work for a company on top-secret technology, obviously you shouldn’t be able to share everything about that secret technology with a competitor. That’s where non-competes are still legal. But, if you work as a cashier at a retailer, your employer cannot forbid you from taking a job at a new shop that opens nearby. A hospital couldn’t force a doctor to never work at another hospital in the same town.

What Are the Penalties?

If you had to sign a non-compete after January 1, 2022, and your occupation isn’t on the list of exceptions, your employer had until February 14, 2024, to notify you that that non-compete was void. This applied even if you’d left that position. Notification had to be sent via mail and email at the last address and email the company had for you.

Failing to notify past and present employees of the law change face fines of up to $2,500 per violation. Employers who enforce illegal non-compete agreements can be charged with civil violations. They can be forced to pay damages and even attorney fees.

If you’re sued for violating an illegal non-compete, you can ask that they cover your legal fees. Plus, you could sue for loss of income when you’re struggling to find work or have to turn down a job offer.

Recent Cases Involving Non-Competes

California took things a step further to protect workers who live in California but have to sign non-compete agreements in other states. California law makes these agreements unenforceable. Whether this offers enough protection is still debated. 

Back in 2011, a Google engineer who helped found Waymo, a self-driving car division, left to start his own company Ottomotto. Otto was acquired by Uber. A lawsuit was filed in 2018 stating that he’d shared more than 120 trade secrets with Uber. Eventually, there was a $245 million settlement. While Google didn’t go after him for going against a non-compete, it’s a case that demonstrates the value of a non-compete for protecting trade secrets.

One recent case involves a former DraftKings executive who lived in New Jersey when he worked for DraftKings. He moved to California and left that position to take a job at Fanatics, despite having signed a non-compete with DraftKings.

He assumed California’s non-compete laws would protect him. DraftKings claims he downloaded classified documents and sued him. Courts ruled that California laws do not apply. The former executive lost his appeal in August. It goes to show that it’s important to talk to an employment law attorney to discuss the legality of a non-compete contract you’ve signed in the past.

With the FTC’s ruling on non-compete agreements and uncertainty on where things stand, it does seem that these agreements could become a thing of the past. Unless you work in a field where you hold trade secrets or are a business partner planning to open up a competing business, you shouldn’t have to sign a non-compete or be held to an agreement you signed in the past. If you’re being told otherwise, seek legal advice to get the latest information.

How Do You Protect Yourself?

Even if you’ve signed a non-compete in the past, it’s not enforceable. Your employer cannot require you to stick to the agreement if you’re not on the list of exceptions to the rule. Should your employer be enforcing a non-compete that you feel is illegal, talk to an attorney specializing in California employment laws.

Consultations are free, so you get honest advice and the information you need to file a complaint. Shegerian Conniff is here to ensure your rights as a California worker are not ignored. Reach us online or by phone.