California Strengthens Non-Competition Law
California’s state policy strongly opposes restraints on employee mobility, and looks askance when businesses attempt to declare their clients and workforce as “off-limits” to those who might attempt to poach them. California public policy finds such “non-compete” agreements as void in most situations. Despite this, many California employers still attempt to require employees to sign non-compete clauses. One reason for this—ostensibly—is that employers may hope the non-compete language serves as a deterrent to employee mobility and competition (i.e., employers may use non-compete language as a scare tactic, despite knowing the clause is likely void).
This fall, California enacted two new bills that further strengthen California’s stance against non-competes. On September 1, 2023, Governor Gavin Newsom signed Senate Bill (SB) 699 into law, which attempts to extend the reach of existing California non-compete law to contracts signed out of state. On October 13, 2023, Governor Newsom also signed Assembly Bill (AB) 1076 into law, which states that restrictive covenants (non-competes fall into this category)—no matter how narrowly tailored—are void unless they satisfy one of the few statutory exceptions articulated below. AB 1076 also requires employers to notify their employees if their existing employment agreements contain such covenants.
Both new laws will have significant impacts for businesses. Employers should take heed of the newly strengthened laws and review any contracts in which they attempt to place restraints on employee mobility.
The History of California’s Stance on Non-Competition Agreements
California Business and Professions Code Section 16600, codified into law in 1941, states that—with limited exceptions—non-competition agreements are void and unenforceable. Specifically, section 16600 provides that any contract that restrains a person from engaging in a lawful profession, trade, or business of any kind is void, subject to limited exceptions. This broad prohibition on non-competition agreements reflects California’s commitment to fostering a competitive and innovative business environment. It encourages employees to change jobs freely and contribute their skills and knowledge to other workplaces and opportunities. As a result, non-competes in California have been, for the most part, unenforceable for decades.
Limited Exceptions in Which Non-Competes May be Valid
There are a few exceptions to Section 16600’s broad prohibition on non-competes:
Protection of Proprietary Information and Trade Secrets: Employers can require employees to sign confidentiality or non-disclosure agreements to protect their trade secrets and proprietary information. However, these agreements should be narrowly tailored and any restrictions in such agreements must be tied to the use of the company’s confidential information.
Sale of a Business: Non-compete clauses may be enforceable in the context of the sale of a business. In this scenario, an agreement can restrict the seller of the business from establishing a competing enterprise within a specified geographic area for a limited time.
Partnership Dissolutions: In partnership dissolution agreements, noncompete clauses can limit former partners’ abilities to engage in competing business ventures. However, the restrictions should be reasonable in terms of time, scope, and geography.
Invention Assignment Agreements: Employees can be required to sign agreements that assign certain intellectual property rights to their employers, provided they are limited to inventions created during the course of employment.
SB 699 Reinforces Existing Law, Attempts to Extend Reach to Out-of-State Contracts, and Adds Enforcement Rights
SB 699 restates existing law by prohibiting employers from entering into a contract with an employee or prospective employee that includes a non-compete clause or other restrictive covenant as void under section 16600.
Moreover, under SB 699, any contract that is void under section 16600 is unenforceable, “regardless of where and when [the contract] was signed.” In other words, SB 699 attempts to extend the reach of existing California non-compete law to new scenarios, such as: (1) when the contract was signed entirely outside of California, or (2) when a restraint on employee mobility was signed in the past (when the law was less clear on the impermissibility of such restraints).
Another important change to California law is that SB 699 adds explicit enforcement rights for employees regarding restrictive contracts:
SB 699 creates a private right of action for employees whose agreements include restrictive covenants and provides for attorneys’ fees for any current, former, or even prospective employee who successfully brings a lawsuit against an employer’s use of those restrictive covenants. This is significant because previously, most courts held that employees did not have a private right of action against employers for the inclusion of a restrictive covenant in an agreement.
SB 699 also states that “an employer who violates that law commits a civil violation.” However, SB 699 does not specify what monetary penalties might attach to such civil violations, nor whether the civil violation referred to in the bill is the private right of action discussed above.
AB 1076 Restates Existing Law and Requires Notice to Employees by February 14, 2024
AB 1076 both amends Business and Professions Code Section 16600 and creates another new statute, Section 16600.1. The amended Section 16600 confirms California precedent that any noncompete clauses, no matter how narrowly tailored, are void unless they satisfy a statutory exception. The new statute, Section 16600.1, declares it unlawful to include a noncompete clause in an employment contract and requires that any companies whose previous contracts included a noncompete clause issue an individualized written notice to all current employees and former employees who were employed after January 1, 2022, that the noncompete clauses in their contracts are void. The deadline for this notice is February 14, 2024.
Unanswered Questions and Anticipated Challenges to SB 699
Given that the language of SB 699 clearly aims to apply California law to out-of-state contracts, commentators expect that SB 699 may face constitutional challenges, particularly with respect to application of California law to matters wholly within another state. Commentators expect that standard choice-of-law rules will apply (i.e., an employer will have to demonstrate that California law should apply to an out-of-state contract, otherwise, the law of the state in which the employee works will likely control). It remains unclear how the courts will resolve these questions.
It also remains unclear what civil penalties an employer may face within California for including non-compete clauses in agreements going forward.
Key Takeaways
Employers should be extremely cautious about the language and scope of non-compete clauses to ensure they comply with California law (i.e., that they meet a statutory exception).
Employers should avoid using non-compete clauses as a scare tactic, given that there is now a private right of action and potential liability attached to doing so.
Employers should review their contracts for non-compete clauses that may apply to employees in other states and assess whether such clauses should be revised or removed.
Employers who included noncompete provisions in their employment agreements with employees who were employed on or after January 1, 2022, must issue an individualized written notice to current and former employees no later than February 14, 2024, stating that any post-employment noncompete clauses are void.
Author: Emily Harrington, Associate.
Maier Law Group is happy to assist our clients with reviewing any non-compete clauses to ensure they comply with California law and/or to recommend that the clause be removed altogether. This article has been prepared for general informational purposes only and does not constitute advertising, solicitation, or legal advice. If you have questions about a particular matter, please contact the Maier Law Group directly.