Most businesses that expand into California, or that hire their first California-based employee, use the same form agreements they use everywhere else. That usually means a non-compete. It’s a reasonable instinct — non-competes are standard practice in most of the country — but in California, the legal landscape is different enough that the same clause can create more problems than it solves.
California has long treated non-compete agreements as void. Recent legislation has gone further, making it unlawful for employers to even include them in employment agreements. For any business with California operations or California-based workers — whether you’re building your compliance foundation or revisiting existing agreements — it’s worth understanding both what the law prohibits and what alternatives remain available.
What Non-Compete Agreements Do
A non-compete agreement restricts an employee’s ability to work for a competitor or start a competing business for some period after their employment ends. These agreements typically define a time restriction, a geographic scope, and the range of restricted activity. In most states, courts will enforce a non-compete if its terms are reasonable.
California takes a different approach.
California’s Rule: Non-Competes Are Void
California Business and Professions Code Section 16600(a) provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The statute has been part of California law in some form since 1872, and courts have interpreted it broadly over the decades.
The California Supreme Court addressed the scope of Section 16600 directly in Edwards v. Arthur Andersen LLP (2008), holding that non-compete agreements in an employment context are invalid even when narrowly tailored. The court declined to adopt the reasonableness standard used in other states. Under Edwards, if a contract restrains someone from engaging in their profession, it is void — regardless of how limited the restriction appears.
In practice, this means employers cannot prohibit former employees from joining competitors, cannot prevent them from starting a competing business, and cannot accomplish the same result through indirect drafting. The scope or duration of the restriction does not change the analysis.
The Exceptions
California law does recognize narrow exceptions, though they arise outside the typical employment relationship.
Sale of a business. When a business owner sells all or substantially all of their ownership interest, the parties may agree to a non-compete that protects the buyer’s investment, including goodwill. This exception is codified in Bus. & Prof. Code §§ 16601–16602.
Partnership or LLC dissolution. Similar provisions may be enforceable when partners or LLC members dissolve a business entity, under Bus. & Prof. Code § 16602.5.
These exceptions are designed to protect the value of a transaction or a dissolved entity. They do not extend to standard employment relationships.
What Changed in 2024
Two bills that took effect on January 1, 2024 — AB 1076 and SB 699 — moved California’s position from passive to active.
AB 1076 added Section 16600.1 to the Business and Professions Code. It codified the Edwards holding and, more significantly, made the inclusion of a non-compete clause in an employment agreement an unlawful business practice under Bus. & Prof. Code §§ 17200 et seq. The bill also imposed a notification requirement: by February 14, 2024, employers were required to provide individualized written notice — by mail and email — to all current employees and to any former employees who worked for the company after January 1, 2022, informing them that existing non-compete provisions were void. Violations may result in civil penalties of up to $2,500 per occurrence.
SB 699 added Section 16600.5, extending California’s prohibition beyond the state’s borders. Under SB 699, an employer may not enforce a non-compete against a California employee regardless of where the contract was signed or where the employment was maintained. The bill also created a private right of action: employees may seek injunctive relief and damages, and prevailing employees are entitled to attorney’s fees and costs.
The practical effect is that employers now face affirmative liability — not just unenforceability — for including non-competes in their agreements.
Out-of-State Agreements
A common question from multistate employers: does a non-compete signed in another state hold up against a California-based employee?
Generally, no. California courts have applied Section 16600 regardless of choice-of-law clauses or forum selection provisions in the agreement. SB 699 codified this approach, providing that employers may not enforce a void non-compete “regardless of whether the contract was signed and the employment was maintained outside of California.”
This matters most for companies with remote or hybrid workers. An employee who relocates to California, or who was hired to work remotely from within the state, is likely protected by California law irrespective of what the agreement provides about governing law.
The FTC’s Federal Rule
For context, the FTC issued a final rule in April 2024 that would have banned non-compete agreements nationwide. A federal court in Texas vacated the rule in August 2024, finding that the FTC had exceeded its statutory authority. There is currently no federal prohibition on non-competes, which means state law — particularly California’s — continues to control.
Enforceable Alternatives
California’s prohibition on non-competes does not leave employers without options. Several types of protective agreements remain enforceable when properly drafted.
Non-disclosure agreements. NDAs are enforceable in California when reasonable in scope. A well-drafted NDA can protect trade secrets, proprietary processes, pricing strategies, and other genuinely confidential business information. The agreement should identify the categories of information it covers with enough specificity to be meaningful — overly broad language invites challenge.
One important constraint: under SB 331, the Silenced No More Act (effective January 1, 2022), any NDA or non-disparagement agreement used as a condition of employment, in a separation agreement, or in a settlement must include an explicit carveout preserving the employee’s right to discuss or disclose information about unlawful acts in the workplace — including harassment, discrimination, and any other conduct the employee has reason to believe is unlawful. An NDA that omits this language is unenforceable to the extent it purports to restrict those disclosures. Employers can still protect trade secrets and proprietary information that do not involve unlawful workplace conduct, and settlement agreements may keep the financial terms of a settlement confidential. But the days of using an NDA to prevent an employee from speaking about what happened to them at work are over. (For a deeper look at how SB 331 reshaped confidentiality provisions across all FEHA-protected classes, see our article The Shrinking Scope of Confidentiality.)
Trade secret protections. California provides strong trade secret protection under both the California Uniform Trade Secrets Act (Civ. Code § 3426 et seq.) and the federal Defend Trade Secrets Act (18 U.S.C. § 1836). Employers who maintain reasonable confidentiality measures — marking materials as confidential, limiting access on a need-to-know basis, requiring NDAs — can pursue injunctive relief and damages against former employees who misappropriate proprietary information.
Customer non-solicitation provisions. There is a persistent belief — often repeated in legal commentary — that narrowly drafted customer non-solicitation clauses can survive Section 16600 if they are tied to the protection of trade secrets. This is a misreading of the case law. In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018), the California Court of Appeal held that a non-solicitation provision was an unlawful restraint on trade under Section 16600 because it prevented former employees from engaging in their profession. The court did not carve out a trade-secret exception for non-solicitation clauses — it invalidated the provision outright. Customer non-solicitation agreements are void in California. If an employer’s concern is that a departing employee will misuse confidential client information, the appropriate tool is an NDA / proprietary rights agreement.
The Risk of Continued Use
Since AB 1076, including a non-compete clause in an employment agreement is an unlawful business practice under Bus. & Prof. Code §§ 17200 et seq. Employers face civil penalties, private lawsuits with attorney’s fee exposure, and claims under Section 17200. There is also a practical dimension — experienced candidates in California’s technology and startup markets recognize unenforceable provisions, and including them in an offer undermines credibility.
Practical Steps for Employers
For companies that operate in California or employ California-based workers, there are a few concrete steps worth considering.
Audit existing agreements — offer letters, employment agreements, equity award agreements, and separation agreements — for non-compete and non-solicitation provisions. Replace them with enforceable alternatives: well-drafted NDAs that comply with SB 331, trade secret protections, and clear confidentiality provisions. And have California employment counsel review any restrictive covenant language before it goes into an agreement. The line between an enforceable NDA and a void restraint on trade is not always obvious from the language alone.
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This article is for informational purposes only and does not constitute legal advice. For guidance on your specific situation, consult a qualified employment attorney.
Grey Ocean helps California employers build protective agreements that work within the state’s legal framework — from compliant employment agreements to trade secret and confidentiality strategies. If your company is navigating these issues, we’re happy to talk through your situation.