Employers Need to Re-Evaluate Non-Compete Agreements Given Recent Legal Changes

Takeaway: Companies need to be careful when using non-compete provisions in agreements, as they are typically non-enforceable.

Recent changes in California law and a vote from the Federal Trade Commission (FTC) have expanded employees’ abilities to challenge noncompete agreements, posing possible challenges for employers, particularly in technology companies and during mergers and acquisitions.

According to the FTC’s recent vote, this rule voids existing noncompetes for non-senior executives and requires employers to notify employees of this change. The rule’s justification is that noncompetes are seen as restrictive, exclusionary, exploitative, and coercive. However, there are concerns about the FTC’s constitutional authority to enact such a rule, leading to legal challenges.

In California law, one specific legal change (S.B. 699) broadens the ban on noncompete agreements to cover out-of-state agreements and allows employees to take legal action against employers who are using unlawful restrictive covenants. It also requires employers to notify affected employees regarding the void nature of such agreements.

Employers should review their existing agreements to ensure compliance with these new laws, especially in merger and acquisition situations where noncompete agreements are often used to protect business interests. Businesses should also consider alternative agreements, like customer no-solicitation agreements, to safeguard trade secrets and intellectual property. Overall, employers need to stay updated on legal changes and take appropriate measures to comply with regulations while protecting their business interests.