Federal Rule Barring Non-Compete Narrows Gap Between California and Rest of U.S.

California employers have contended with the state’s prohibition on post-termination non-compete agreements for more than 150 years, and they may now have a thing or two to teach the rest of the country. 

The Federal Trade Commission adopted a rule that will prohibit new non-competes and invalidate many existing ones on September 4, 2024, nationwide, unless one or more court challenges are successful in blocking the rule.  

The new FTC rule bans a non-compete agreement or policy that prohibits, penalizes, or functions to prevent a worker from seeking or accepting work or operating a business after the end of employment. The rule applies not just to employees but also independent contractors.  

Like in California, the federal rule contains a sale-of-business exception and requires employers to provide notice to employees who signed agreements that are invalid.  (California beat the FTC by just a few months in imposing a notice rule as of February 14, 2024.)  

The federal rule, however, does not provide a private right for employees to sue employers that fail to comply – as California does – and the federal rule has a narrow exception for senior executives in “policy-making” positions who earn at least $151,164 if they entered agreements prior to September 4^th.  (No such limit exists under California law.) 

All of this means that non-California companies may be looking to their California peers for ways to protect their interests in the face of a new ban.  After all, California companies have a lot of practice, and there are steps that companies can take to protect their business interests under both the federal and state bans even if they cannot use non-competes.

First, companies can utilize confidentiality agreements, trade secret protections, and invention assignments to protect sensitive and proprietary business information from theft and disclosure.  The agreements need to be crafted to comply with legal requirements, but neither the federal nor state non-compete bans require employers to tolerate the misuse of confidential or proprietary business information. Likewise, the bans do not mean that former employers have to allow former employees to give competitors a design or product made on the company’s dime. Properly drafted invention assignments can protect employers’ investments in the employees’ labor. 

Second, companies can and should implement policies and procedures to protect confidential and proprietary information, not just from outsiders, but also employees who do not need the information to perform their duties. While some employees will need access to some confidential and sensitive information to perform their duties, companies can and should consider who gets access and how much.  

Finally, some companies may want to look at so-called “garden leave” for employees whose specialized knowledge poses so much of a risk that the company is willing to pay them for a period without requiring them to perform any duties.  The use of such leaves is not completely without legal risk; the concept of garden leave, which developed in the UK, remains largely untested in California courts. But the FTC indicated that its rule would not preclude employers from keeping an employee on the payroll with the same salary and benefits on a pro rata basis. And as a practical matter, few employees are anxious to give up or avoid being paid their regular salary to do nothing for a period of time.

The landscape on non-competes nationally is likely to remain in flux while court challenges proceed, but California employers will need to continue their long tradition of trying to protect their interests by other means.