The Sincerest Form of Flattery: The Nation may Follow California’s Lead on Noncompetes

Since 1872 – more than 150 years ago – California rejected noncompete agreements in favor of open competition.

That seems like a straightforward American concept: competition is good. Let people work wherever they want, and competition – and therefore quality of product as well as standard of living – will increase.

Nonetheless, most states allow some form of restriction of employee mobility. In most states, your employer can prohibit you from working for a competitor within a “reasonable” distance and within a “reasonable” amount of time. The meaning of “reasonable” varies from state-to-state, but fifty miles and one or even two years are generally considered within bounds.

I. California is Different

But we all know that California is different in many ways. Here, our State is much more supportive of workers’ rights than most. Noncompetition agreements, and their close cousins anti-solicitation agreements, are for the most part illegal. There are exceptions, involving the sale of goodwill of a business, but they don’t pertain to most employees and are beyond the scope of what I’m writing about here.

California prohibits any restriction on where one can work. The case of Thompson v. Impaxx, Inc., -- which I litigated and won myself – included anti-solicitation agreements in that prohibition. In other words, California rejects the so-called “rule of reasonableness” adopted by many other states.

California has also completely rejected the “inevitability doctrine,” which states that a worker who leaves their employer will inevitably reveal whatever trade secrets they may have learned. Instead, the burden is on the employer to prove that actually happened before the courts will act.

II. The Federal Government May Follow California’s Lead

Now, the Federal Trade Commission, pursuing its stated mission of re-invigorating Title V (unfair competition) of the federal FTC Act, is considering a regulation prohibiting noncompete agreements throughout the country.

The proposed regulation is worded broadly. It includes independent contractors as well as employees. It not only makes noncompete agreements illegal. It also requires employers to withdraw any currently in existence, and affirmatively to tell individuals with whom they had such agreements that it is being withdrawn – a provision that goes even further than California law.

The proposed regulation includes a functional test: in other words, even if an agreement isn’t labelled a noncompete, if it limits a worker’s mobility in practice, it may still be found to be illegal. The proposed regulation specifically calls out overbroad nondisclosure agreements, and requirements to pay back training costs. It doesn’t specifically prohibit anti-solicitation agreements, but given the anti-competitive nature of them and the functional test the FTC proposes, they will probably be interpreted as being included.

The proposed regulation includes a similar exception for sale of goodwill of a business that California’s law has.

III. Where is the Regulation Now?

The FTC proposed this rule in early January 2023, and entered into the process of Notice of Proposed Rulemaking by a 3 – 1 vote. That’s the first step for the FTC in codifying a regulation. The agency is currently looking for public comment.

The FTC’s publication includes extensive citations to research, which generally show that noncompete agreements suppress wages, hinder innovation and entrepreneurship, and generally inhibit job growth. The agency estimates that eliminating noncompetition agreements nationwide will increase worker wages by nearly $300 billion per year.

IV. Conclusion

California has prohibited noncompetition agreements almost since it joined the Union. There are many ways in which we lead the country, and in this area, it looks like the country may be following.