If you own or manage a business in California, noncompete clauses should already be on your radar. California has long taken one of the strictest positions in the country against contracts that restrict someone from working in their lawful profession, trade, or business.
Now, the issue has become even more important for companies that operate across state lines.
On May 8, 2026, FTC Chairman Andrew Ferguson issued a public warning letter to a Pennsylvania employer, signaling that federal regulators are paying close attention to how companies use and enforce noncompete agreements. For California businesses, this development adds another layer of risk to an area of law that was already highly restrictive.
DPA Attorneys at Law works with business owners and managers to review, draft, and defend business agreements that are designed to protect the company without crossing legal lines. Here is what California businesses should understand about noncompete clauses, restrictive covenants, and contract review in 2026.
California’s Noncompete Ban Is Broad
California Business and Professions Code Section 16600 is one of the broadest noncompete prohibitions in the United States. In general, it voids any contract that restrains a person from engaging in a lawful profession, trade, or business, subject only to limited exceptions.
California law became even more aggressive on this issue beginning January 1, 2024, through AB 1076 and SB 699. Under these laws:
- Employers generally cannot enforce noncompete agreements against California-based employees, even if the agreement was signed in another state.
- Employers generally cannot require employees to sign noncompete agreements as a condition of employment, regardless of where the employer is headquartered.
- Violations may expose businesses to civil penalties and injunctive relief.
For California employers, this means that an employment agreement containing a noncompete clause is very likely void and unenforceable. Worse, keeping that language in your agreements may create legal exposure instead of protection.
This matters for a wide range of businesses, including hotels, QSR operators, car wash companies, gas stations, real estate businesses, short term rental operators, and multi-family property businesses that rely on employees, vendors, managers, and contractors to keep operations moving.
The FTC’s 2026 Warning Adds Federal Risk
The FTC’s warning letter to Mortgage Connect L.P. shows that federal regulators are not only looking at written policies. They are also watching how companies enforce noncompete agreements in court.
According to the source material, FTC staff are reviewing publicly available court dockets to identify employers that use noncompete agreements in an “indiscriminate or overbroad manner.”
Several points stand out for business owners:
- Blanket noncompetes are a red flag. The FTC criticized the use of noncompetes for all employees regardless of role or responsibility.
- Less restrictive alternatives matter. If a business already uses non-disclosure or non-solicitation agreements, regulators may question why a broader noncompete is necessary.
- Litigation may draw attention. Filing a lawsuit to enforce a noncompete could itself invite regulatory scrutiny.
For California companies with employees, contractors, or business interests in other states, this creates a dual compliance problem. California already prohibits most employment noncompetes, while the FTC is signaling that even in states where noncompetes may be permitted, overbroad enforcement can create federal risk.
DPA Attorneys at Law helps California businesses evaluate these issues before a contract dispute turns into litigation, regulatory attention, or an unenforceable agreement.
The Sale-of-Business Exception Still Exists, But It Must Be Narrow
California does recognize an important exception to its noncompete ban in the sale-of-business context. Under Business and Professions Code Sections 16601 through 16602, a seller of a business, a partner dissolving a partnership, or a member leaving an LLC may agree to certain restrictions tied to the sale.
The reason is practical. When a buyer purchases a business, the buyer is often paying for goodwill, customer relationships, brand value, and competitive position. A properly drafted noncompete can help prevent the seller from immediately undermining the value that was just sold.
But this exception is not a blank check.
A sale-of-business noncompete should be tied to the actual business interest being transferred. It should not prevent the seller from working in any capacity, in any industry, or in any market unrelated to the goodwill purchased.
Recent cases from other jurisdictions reinforce that distinction. In one case noted in the source material, a court enforced a five-year noncompete against a founder who sold a business for $450 million and then helped relatives start a competing operation. In another, a court rejected restrictions that were broader than the competitive space the buyer actually purchased.
The takeaway for California business owners is clear: sale-of-business restrictive covenants can still be useful, but they must be precise.
What California Business Owners Should Review Now
If your company has not reviewed its business contracts recently, this is a good time to do it. Noncompete language often appears in agreements even when no one has focused on whether the clause is enforceable.
Start with these documents:
- Employment agreements
- Independent contractor agreements
- Vendor agreements
- Management agreements
- Franchise or operating agreements
- Purchase and sale agreements
- Partnership, shareholder, or LLC agreements
- Confidentiality and non-disclosure agreements
This is especially important for businesses with operations in Orange County, Los Angeles County, San Diego County, Riverside County, San Bernardino County, Ventura County, or elsewhere in California, where employment-related restrictive covenants can create significant exposure.
Use Enforceable Alternatives Where Appropriate
Business owners still have legitimate interests to protect. The key is using the right tool for the right risk.
Depending on the circumstances, alternatives may include:
- Non-disclosure agreements to protect confidential information and trade secrets
- Trade secret protections tailored to sensitive business information
- Invention assignment agreements for intellectual property created during employment
- Customer non-solicitation provisions where legally appropriate, especially in sale-of-business transactions
- Carefully structured transition or garden leave provisions, where enforceability should be reviewed with counsel
For hotels, QSR businesses, car washes, gas stations, real estate companies, short term rental operators, and multi-family owners, these protections can be critical. Customer lists, vendor pricing, operating procedures, acquisition strategies, and internal business systems may all have value. But the agreement must protect those interests in a way the law will recognize.
Multi-State Businesses Need a More Careful Approach
A one-size-fits-all contract is no longer a reliable strategy.
A business headquartered outside California may still face California restrictions if it has California-based employees or operations. Likewise, a California company doing business in other states may need agreements that account for different state laws while still avoiding overbroad restrictions.
For contract and transactional work, DPA Attorneys at Law has attorneys licensed in every state to service clients with multi-state business needs. For California litigation defense and employment law matters, DPA Attorneys at Law handles those matters in California only.
That distinction matters. Contract language should be drafted with the company’s actual footprint in mind, including where the employees work, where the business operates, where the agreement may be enforced, and what legitimate business interest the company is trying to protect.
Document the Business Interest You Are Protecting
If your company uses restrictive covenants in a valid sale-of-business setting or in a state where certain restrictions may be permitted, the agreement should identify the legitimate business interest being protected.
That may include:
- Trade secrets
- Confidential business information
- Customer relationships
- Goodwill purchased in a business sale
- Specialized training or investment
- Intellectual property
- Competitive information tied to a specific transaction
Vague justifications are becoming harder to defend. The FTC’s 2026 warning suggests that regulators may look closely at whether the restriction is actually necessary or whether a narrower agreement would have protected the business just as well.
The Bottom Line for California Businesses
California’s noncompete ban is not new, but the enforcement landscape is changing. The FTC’s 2026 warning, combined with ongoing scrutiny of restrictive covenants, means business owners should be more careful about what their agreements say and how those agreements are enforced.
A poorly drafted noncompete can create several problems at once: it may be unenforceable, it may fail to protect the business, it may create California law exposure, and it may invite unwanted regulatory attention.
The better approach is to review your contracts now, remove risky language where needed, and replace overbroad restrictions with enforceable protections that match the business interest at stake.
DPA Attorneys at Law helps business owners and managers draft, review, and defend business contracts designed to protect their companies. To learn more, visit www.dpalaw.com.
If you have questions about noncompete clauses, restrictive covenants, contract review, or business legal representation, reach out to DPA Attorneys at Law at info@dpalaw.com or 760-372-0007 to discuss your matter.
