California Doubles Down on It’s Longstanding Hostility Against Non-Compete Agreements

While California has long prohibited noncompete agreements (subject to narrow exceptions), two California bills recently signed into law expand the scope of the State’s policy against these restrictive covenants. On September 1, 2023 and October 13, 2023, Governor Gavin Newsom signed Senate Bill 699 and Assembly Bill 1076, respectively, two new laws that strengthen the State’s prohibition on noncompetes found in California Business & Professions Code Section 16600. Both laws go into effect on January 1, 2024.

SB699: Noncompetes are Void, No Matter Where or When Signed

Section 16600 of the California Business and Profession Code states 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,” with only three narrow exceptions in connection with the sale of a business, the dissolution of or dissociation from a partnership, or the dissolution or termination of interests in a limited liability company.

SB 699 expands on Section 16600 to prohibit an employer from entering into or attempting to enforce a noncompete agreement, regardless of whether the contract was signed outside of California. Under the new law, any contract that is void under Section 16600 is unenforceable “regardless of where and when the contract was signed.” The new law likewise prohibits an employer or former employer from enforcing a void contract “regardless of whether the contract was signed and the employment was maintained outside of California.” SB 699 will be codified as Section 16600.5 of the Business and Professions Code.

The law also provides that an employer who violates the law commits a civil violation. It authorizes an employee, former employee, or prospective employee to bring a lawsuit to enforce the law and allows a prevailing employee to recover injunctive relief, actual damages, or both, as well as reasonable attorneys’ fees and costs. Previously, many of these claims were litigated as declaratory relief actions to obtain a court order that the alleged offending provision was void. Now, the availability of a private right of action with statutory attorneys’ fees raises the risk of litigation in this arena. Furthermore, employers that continue to use employee nonsolicitation agreements may face heightened risks under SB 699, as some California state and federal courts have previously found that such post-employment restrictive covenants are tantamount to noncompetes.

Under the new law (assuming it is upheld after likely challenges to its enforceability), an employee who signs a noncompete agreement in another state and then comes to California to work for a new employer will be able to flout the previously signed noncompete agreement (and the new California employer will likewise be able to disregard the previously signed noncompete) — as specifically referenced in the preamble to SB 699. At the same time, the new law may also mean that California-based employers cannot enter into or enforce noncompete agreements with employees who live and work entirely outside of California.

SB 1076: Codifying Noncompete Prohibitions and Adding New Protections

AB 1076 expands Section 16600 by amending that section and adding a new Section 16600.1. The amendments to Section 16600 codify California precedent in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008), that employee noncompete clauses are void unless they fall into one of the three express statutory exceptions mentioned above, rejecting the “narrow restraint” exception that some (especially federal) courts had previously followed. The amended Section 16600 further provides that the application of Section 16600 “shall not be limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.”

The new Section 16600.1 makes it unlawful to include a noncompete clause in an employment contract, or to require an employee to enter into a noncompete agreement. It further requires companies that have noncompetes with employees to issue a notice informing all current and former employees who were employed after January 1, 2022 that the noncompete agreements or clauses are void. The deadline for this notice is February 14, 2024. A violation of this section constitutes unfair competition under California Business & Professions Code section 17200, et seq.

As always, the Labor and Employment team at Mitchell Silberberg & Knupp remains available to advise on how employers can comply with the myriad obligations set forth in California’s two newest laws concerning noncompete agreements.