Noncompetes in California: what AI companies and tech workers need to know

The rule

Business and Professions Code section 16600 says that every contract that restrains anyone from a lawful profession, trade, or business is void to that extent, unless a statute makes an exception. California has had this rule since 1872.

In Edwards v. Arthur Andersen LLP (2008), the California Supreme Court refused to carve out "narrow" or "reasonable" restraints. A clause that limits where a worker can go next is void even if it is short or covers a small area. Edwards also voided a clause that barred the employee from working for former clients.

The 2024 laws

Two laws that took effect January 1, 2024 added teeth to the rule.

• Section 16600.5 (SB 699) says a void noncompete cannot be enforced no matter where or when it was signed. An employer may not sign one with a worker or try to enforce one. A current, former, or prospective employee can sue for an injunction, actual damages, and attorney fees.
• Section 16600.1 (AB 1076) required employers to send written notice, by February 14, 2024, to current workers and to former workers employed after January 1, 2022, whose contracts contained a noncompete, telling them the clause is void. Breaking this rule is unfair competition.

Courts have not agreed on how far section 16600.5 reaches when the employer and the contract are outside California. If you are recruiting from another state, or moving here with a noncompete signed elsewhere, expect a fight over which state's law applies.

The three exceptions

A noncompete can be valid in three business-ownership settings:

• Selling a business: a person who sells the goodwill of a business, or all of their ownership interest, can agree not to compete in the area where the business operated (section 16601).
• Leaving a partnership: a partner can agree not to compete when the partnership dissolves or the partner leaves (section 16602).
• Leaving an LLC: the same rule applies to LLC members (section 16602.5).

These exceptions turn on selling or giving up ownership. Courts read them narrowly. For founders, see leaving a California startup.

What a company can still protect

Section 16600 does not let a worker take trade secrets. The California Uniform Trade Secrets Act still protects source code, model weights, customer data, and other information that has value because it is secret and that the company takes reasonable steps to protect. Confidentiality agreements remain valid if they are aimed at real confidential information.

Clauses that stop a worker from soliciting coworkers are on weak ground. A California appellate court held one void for recruiters in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc. (2018).

Coming in 2027: stay-or-pay clauses

A stay-or-pay clause makes a worker repay a signing bonus, training costs, or similar money if they leave early. AB 692 restricted these clauses through Business and Professions Code section 16608 and Labor Code section 926. On September 30, 2026, the Governor signed AB 1697, which delays the law so it applies only to contracts entered into on or after January 1, 2027, and adds exceptions, including for some retention bonuses. Review offer letters and bonus agreements before the new year.