California Strengthens Non-Competition Law
California has passed two new items of legislation, Senate Bill 699 and Assembly Bill 1076, which will further regulate and restrict the enforcement of employment non-compete agreements in California, and expand the scope of remedies for those affected by them. These new laws will become effective on January 1, 2024, and now is the time for employers to assess and revise their employment-related agreements and restrictive covenants accordingly. As detailed below, they also require employers to notify employees and certain former employees by February 15, 2024 that certain non-compete provisions are void. The two new laws are detailed below.
SB 699
It has long been a fundamental tenet of California law that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”[1] Accordingly, California Courts have generally voided any non-competition and non-solicitation agreements except in narrow circumstances, such as in connection with the sale of a business or in a business-to-business context subject to the rule of reason.
SB 699 expands this prohibition to not only non-competes entered into in California, but also out-of-state non-competes.
Codified as Section 16600.5, SB 699 will make it unlawful to enforce an agreement that is void under Section 16600 “regardless of whether the contract was signed and the employment was maintained outside of California.”[2] Effectively, it permits a person subject to a valid non-compete agreement from another state to seek employment in California and invoke Section 16600.5 to prevent the enforcement of the out-of-state non-compete within California.
Section 16600.5 also clarifies that any employer who enters into contracts with an employee or prospective employee in violation of Section 16600 will have committed a “civil violation.” In that scenario, the affected employee or prospective employee may bring a private action to enforce Section 16600.5, and seek injunctive relief, actual damages, and attorney’s fees.
AB 1076
AB 1076 requires employers to affirmatively notify all current employees and former employees (those employed after January 1, 2022) who signed a void non-compete, that the clause or agreement is void. Employers must provide this notice by no later than February 14, 2024. The communications must be sent to both the last known address and email address of each individual employee.
The bill also amends Section 16600 by codifying existing caselaw found in Edwards v. Arthur Andersen LLP.[3] In Edwards, a tax manager brought suit against his former employer, Arthur Andersen LLP (“Andersen”), over an eighteen month non-compete. Andersen argued that the court should adopt a narrow-restraint exception to Section 16600. Ultimately, the California Supreme Court held that a non-compete agreement, no matter how narrowly tailored, is void if it does not meet a statutory exception. The Edwards holding is now codified as an additional subsection of Section 16600. In addition, Section 16600.1 makes it not only void but also unlawful to impose employment-related non-compete provisions or contracts that do not fall within a statutory exception, and an act of unfair competition.[4]
The full effect of both AB 699 and AB 1076 remains to be seen. Important questions remain such as whether these new laws apply to in-term (during employment) restrictive covenants consistent with an employee’s duty of loyalty, how these provisions interplay with Labor Code section 925(e), which otherwise permits a represented employee to enter into agreements under the law of another state, whether they apply to contracts signed before the effective date, how they will play out in federal v. state court, whether and how courts in other states such as Delaware will enforce the new law, whether they will hold up to constitutional challenges, whether the protections of the new law will apply to individual contractors and consultants, and whether employers with employees throughout the U.S. must give the notice to all employees, not just those in California.
Regardless of these unanswered questions, employers are well advised to assess these laws with counsel now and take appropriate steps to promote compliance.
FOOTNOTES
[1] California Bus. & Prof. Code § 16600 (all Business and Profession Code Sections will be referred to herein as “Section”).
[2]
[3] Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937.
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