USA – CALIFORNIA Trends and Developments Contributed by: Aaron Nathan, Samantha Jameson and Azra Hadzimehmodovic, Tensegrity Law Group LLP
Implications of California’s Ban on Stay-or-Pay Contracts Another significant development in California is the recent implementation of a statutory ban of so-called stay-or-pay clauses in employment contracts. Assem - bly Bill (AB) 692 went into effect as Cal. Bus. & Prof. Code § 16608 on 1 January 2026. This new statutory provision states that, subject to certain exceptions: “[F]or contracts entered into on or after January 1, 2026, it shall be unlawful to include in any employ - ment contract, or to require a worker to execute as a condition of employment or a work relationship a contract that includes, a contract term that does any of the following: (A) Requires the worker to pay an employer, training provider, or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates. (B) Authorizes the employer, training provider, or debt collector to resume or initiate collection of or end for - bearance on a debt if the worker’s employment or work relationship with a specific employer terminates. (C) Imposes any penalty, fee, or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.” Cal. Bus. & Prof. Code § 16608. This new statute is part of a broader legal framework in California pro - tecting employee mobility and expands California’s already broad determination not to enforce restrictive covenants that tend to limit employee mobility. See Cal. Bus. & Prof. Code § 16600 (2025) (“This section shall be read broadly... to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy an exception in this chapter”). Because restrictions on employee mobility are one strategy for reducing the risk of loss of trade secrets to competitors, it is reasonable to postulate that – all else being equal – claims of trade secret misappropriation may increase as a result of this further limitation on the viability of such contracts. The magnitude of any such impact of course remains to be seen, particularly given that the
new statute applies only to contracts entered on or after 1 January 2026. Developments at Nexus of Trade Secret and AI A discussion of the current trends of trade secret liti - gation in California requires consideration of the inter - actions between the rapidly evolving AI landscape and trade secret protection. One such point of interaction connects to the broad area of employee mobility. The issue of employee mobility is a well-known concern in the AI industry. In February 2026, xAI’s DTSA trade secret misappropriation claims against OpenAI in con - nection with OpenAI hiring certain former xAI employ - ees were dismissed with leave to amend for failure to plead sufficient facts to allege direct or indirect liability for misappropriation. X.AI Corp. v OpenAI, Inc. , No. 25-cv-08133-RFL, 2026 LX 10330 (N.D. Cal. Feb. 24, 2026). Of particular interest, the court explained that while one employee “did eventually begin working for OpenAI... xAI does not allege that he ever used any of its trade secrets in his new job”. Id. at *17. While the employee “allegedly exfiltrated xAI’s source code” about a month before “beginning his employment with OpenAI (presumably in a role similar to his position at xAI)”, that “is not enough to allow a reasonable infer - ence that [the employee] actually used those trade secrets at OpenAI”. Id. The court explained that hold - ing otherwise would “undercut the well-established principle that mere possession of trade secrets is not sufficient to constitute misappropriation” and “would automatically subject future employers to potential trade secret misappropriation liability every time they hired someone who, without their knowledge before - hand or ratification afterwards, had improperly taken confidential information from their former employer on the way out the door, even if there is no indica - tion that the information was actually used in the sub - sequent job”. Id. at *17-18 (internal quotation marks omitted). While the principle that mere possession of trade secret information is insufficient to establish misappropriation is not new, the recent battle for AI talent has put a special emphasis on the challenges of protecting trade secrets in the context of employee mobility. xAI has recently amended its pleading, and the outcome of this suit remains to be determined. X.AI Corp. v OpenAI, Inc ., No. 25-cv-08133-RFL, Dkt. No. 81 (N.D. Cal. Mar. 17, 2026).
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