This article provides a brief history of California’s pro-competition law and describes the stalled federal initiative to extend a similar noncompete ban nationally, notwithstanding the overlapping policy interests expressed by the Federal Trade Commission.
- Brief Background
Years ago, I recall reading an Economist article describing California’s non-compete ban as the reason why both Silicon Valley and Hollywood took root in California. See Ties that bind: The market for smart people is clogged up by all manner of dubious legal restrictions (Dec. 14, 2013). The article reasoned that without the free flow of skilled labor, these industries would not have been able to innovate as quickly or to benefit from the knowledge of those who had worked in related industries.
As a healthcare attorney, I note the impact such policies could, but do not, have on the free flow of skilled healthcare providers from hospitals to surgery centers and to their competitors and from one medical or healthcare professional corporation to the next. In fact, the most common question that I receive as an attorney is whether a contract’s noncompete clause is enforceable. I’ve fielded this question dozens of times and even litigated it.
As such, it piqued my interest last April when the Federal Trade Commission (FTC) issued a Final Rule proposing to extend this rule nationally. The recent “hold’ placed on appeals of two Court injunctions preventing the enforcement of rule supports established businesses, but likely discourages new entrants to the market, or at least heightens the barriers to entry, and lessens competition in both the short and long term.
- California’s Historical Non-Compete Ban
As part of the very fabric of this fledgling state, California decided to take a different approach to competition by rejecting the common law “rule of reasonableness” for noncompete clauses in 1872. See former California Civil Code section 1673. In 1941, the noncompete ban was adopted with substantively the same language as Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
California does have limited exceptions to the general rule against enforceability. In 1941, the Legislature added Business & Professions Code section 16601 regarding the sale of good will of the business to another and section 16602 regarding dissolution of a partner from a general partnership. In that instance, where the seller has been compensated for the value of the business, together with its goodwill, there is a reasonable expectation that the seller will leave the market for some time to avoid competing with the new business owner. Then, in 1994, California added section 16602.5 containing an enumerated exception for dissolution of a member from a limited liability company.
In 2024, the law was amended again to clarify that: (i) only the exceptions enumerated in statute are enforceable; (ii) for contracts dated January 1, 2022 or later, employers must provide notice to employees that any such clauses in their contracts are unenforceable; and (iii) violations may be pursued under California’s Unfair Competition Law.
California’s lawmakers recognize that non-competes are a restraint on trade, a deterrent to innovation, and a potential antitrust violation. Industries tend to form in clusters. If all of Company A’s employees are bound to Company A for several years after leaving and can never work for another company in the same geographic area, then the effect tends to be that the employees leave the profession altogether, rather than finding a similar company in a different city or state.
Interestingly, in case law, this ban has mostly been litigated in the healthcare market. In Bosley Medical Group v. Abramson, 161 Cal. App. 3d 284 (1984), the court reviewed a physician’s departure from the medical group and whether the sale of all of his shares qualified as the sale of good will under Section 16600. The Court noted that Dr. Abramson owned a nominal portion of the corporation and 95% of its net revenue went to Dr. Bosley, the majority owner. The Court declined to apply the exception set forth in Section 16601, finding no good will transferred when Dr. Abramson left the medical group.
Hill Medical Corp. v. Wycoff, 86 Cal. App. 4th 895 (2001) involved a radiology group with a non-compete ban in its Employment and Share Repurchase Agreement. The clause was held void and enforceable under Section 16600 and not saved by Section 16601 because there was substantial evidence supporting the trial court’s conclusion that Dr. Wycoff’s exit from the medical group did not result in the transfer of good will. Since every physician was required to be a shareholder of the corporation, his nominal ownership of shares did not warrant saving the non-complete clause. And the Court would not re-write the clause to be consistent with California law, given California’s strong public policy against such clauses.
In Ixcel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130 (2020), the California Supreme Court seemed to be reviving the “rule of reason” in California by allowing business-to-business contracts to contain reasonable restraints on trade. In this case, one company had agreed not to compete with Biogen, Inc. and thereafter cancelled its agreement with Ixcel Pharma, LLC to develop a specific ingredient into a pharmaceutical. Since the clause at issue was not in an employment agreement and did not involve the sale of a business, California’s highest court held that the legality of such clauses in a contract between two businesses hinged on whether: (i) the agreement harms competition more than it helps by considering the facts peculiar to the business in which the restraint is applied; (ii) the nature of the restraint and its effects; and (iii) the history of the restraint and the reasons for its adoption. In sum, the Court adopted the rule of reason used to analyze antitrust violations under the Cartwright Act. See Business & Professions Code sections 16722, 16726.
III. Proposed Federal Extension of the Noncompete Ban
On May 7, 2024, the Federal Trade Commission (FTC) issued its final rule banning non-compete clauses as unfair methods of competition for all employees other than senior executives. Prior to the effective date of September 4, 2024, district judges in Texas and Florida issued preliminary injunctions enjoining the FTC’s noncompete rule. See Ryan, LLC v. FTC, Case No. 3:24-cv-00986; 24-usc-10951 (N.D. Tex. 2024); Properties of the Villages, Inc. v. FTC, Case No. 5:24-cv-316; 24-usc-13102 (M.D. Fla. 2024). A federal court in Pennsylvania reached the opposite conclusion. ATS Tree Services, LLC v. FTC, Case No. 2:24-cv-01743 (E.D. Pa. 2024). The FTC appealed both rulings against it, and the Trump Administration suspended both appeals in the U.S. Courts of Appeals for the Fifth and Eleventh Circuits, respectfully. On July 10 and July 18, 2025, the FTC filed unopposed motions requesting a further stay of proceedings. At the same time, the FTC Chair appointed by the Trump Administration continues to emphasize his view that the noncomplete agreements potentially harm competition in labor markets. With the FTC ban unlikely to take effect, one wonders what the future holds for non-competes. Will the FTC ultimately seek to enforce an open competition policy or side with established businesses?
