November 28, 2023Client Alert

One-Two Punch: California’s Two New Laws Aiming to Further Ban Post-Employment Noncompete Agreements

On September 1, 2023, and October 13, 2023, respectively, California Governor Gavin Newsom signed Senate Bill (SB) 699 and Assembly Bill (AB) 1076 into law further reinforcing the state’s hostility toward non-compete agreements. The laws respectively now: (1) make it illegal for employers to require employees to sign non-compete agreements, and (2) require employers to notify current and former employees that any non-compete restrictions they agreed to are void.

It is no secret California has a long history of disfavoring post-employment restrictions. That history is partly expressed in Section 16600 of the California Business and Professions Code providing for broad restrictions prohibiting not only non-compete agreements, but any agreements or provisions that are arguably like non-compete covenants, such as customer non-solicitation agreements. Section 16600 provides for very limited exceptions, such as the sale of a business, the dissolution of a partnership, and the dissolution or termination of interests in a limited liability company.  California courts interpret Section 16600 broadly and have routinely invalidated non-compete agreements.

In reaction to employers using non-California venue and choice of law clauses to enforce agreements against California residents otherwise prohibited by Section 16600, California passed California Labor Code Section 925 in 2016 which generally allowed an employee to void out-of-state choice of law and venue provisions (in favor of California provisions) for California residents. Unless the employee was represented by counsel when the agreement was signed.  Section 925 also allows an employee to collect attorney’s fees in order to enforce their rights under Section 925.

The two new laws tighten the screws even further.

SB 699

If the text of SB 699 can be of any indication, the need for the new law was dictated by the fact that despite California’s strong policy against non-compete agreements, “California employers continue to have their employers sign non-compete clauses that are clearly void and unenforceable under California law.” The California Legislature underscored that employers litigating the enforceability of non-compete agreements create a chilling effect on employee mobility. Among other interests, it identified California’s “strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence”.

Against this backdrop, SB 699 created a new section in the Business and Professions Code, Section 16600.5, providing that “any contract that is void under Section 16600 is unenforceable regardless of where and when the contract was signed.” (Emphasis added.) Specifically, the new law provides that an employer or a former employer shall not:

  • Attempt to enforce a void non-compete agreement regardless of whether the contract was signed and the employment was maintained outside of California; and
  • Enter into a contract with an employee or a prospective employee that includes a void non-compete clause.

The law provides that employers who violate this new section commit a civil violation. To raise the risk of litigation for employers, the new law creates a private right of action, allowing employees, former employees, and prospective employees to initiate lawsuits to seek injunctive relief or actual damages, or both. To give SB 699 even more teeth, the California Legislature included a fee-shifting provision, allowing a prevailing employee, former employee, or prospective employee enforcing this new law to recover their reasonable attorneys’ fees and costs.

Although SB 699 is a new California law, it should get the attention of employers across the country. After all, SB 699 prohibits an employer from enforcing a non-compete provision that is void under California law regardless of whether it was signed and the employment was maintained outside of California. Although subject to a potential constitutional challenge, the new law appears to be designed to create a safe haven for employees seeking relief from non-compete agreements that otherwise would be enforceable in a different state.

For example, an employee who lives and works in Wisconsin, where narrowly tailored employment non-compete agreements are permitted, can avoid his non-compete obligations by simply moving to California and taking employment there. The employee’s otherwise valid Wisconsin agreement containing post-employment restrictions can now be invalidated under SB 699.

In addition, it is not difficult to imagine a scenario for potential abuse. Where, for example, a California employer hires an Illinois employee with an otherwise enforceable non-compete agreement under Illinois law, moves and houses that person in California for the period while that employee’s litigation to invalidate the non-compete agreement under SB 699 plays out, and then allows the employee, who is no longer obligated to comply with his Illinois noncompete agreement, to move back to Illinois.

What practical effect SB 699 will have on the workforce in California and across the nation remains to be seen, but employers should certainly take note of these new developments that may have lasting consequences for employers located even outside of California.

AB 1076

AB 1076 took things even further. The stated purpose of AB 1076 is to codify existing case law by clarifying that Section 16600 is to be broadly construed to void the application of any post-employment noncompete agreements that do not satisfy the limited exceptions, no matter how narrowly tailored.

The law creates a new section of the Business and Professions Code, Section 16600.1, that expressly prohibits employers to include a non-compete clause in an employment contract or to require an employee to enter a non-compete agreement that does not satisfy the exceptions under Section 16600.

Moreover, the new law mandates employers provide a written individualized communication to all current employees and all former employees (employed after January 1, 2022), whose contracts include a non-compete clause or who were required to enter a non-compete agreement that does not satisfy an exception under Section 16600, notifying them that their non-compete clauses or non-compete agreements are void. 

The law requires that the notification compliance takes place by February 14, 2024.

The law also provides that violation of this newly created Section 16600.1 constitutes an act of unfair competition within the meaning of Section 17200 of the Business and Professions Code.

Next Steps for Employers

The scope of these new laws is debatable. Although neither SB 699 nor AB 1076 defines what a “non-compete” clause or agreement is, the broad language of these statutes and the prior history of the applicable legal precedent suggest it may include not only non-compete or customer non-solicitation agreements. But it may potentially extend to other agreements, such as employee non-solicit/no-hire agreements or even broadly written non-disclosure agreements that impact an employee’s rights to compete under Section 16600.

Considering the potentially harsh penalties for non-compliance with SB 699 and AB 1076, employers, especially those with operations or employees in California, may want to do the following:

  • Review their template California employment agreements to ensure they do not violate the new laws;
  • Refrain from entering into agreements with employees containing post-employment noncompete covenants;
  • Conduct a privileged audit of agreements with current employees and former employees hired after January 1, 2022, including those employees who previously signed employment-related agreements when they were residents of other states but have since moved to California, to assess whether they include post-employment noncompete covenants; and
  • Determine whether an AB 1076 notice is required and send such individualized notice in writing to the last known address and email address of each affected employee by February 14, 2024.

For more details, employers should consult with experienced employment attorneys to receive further advice and guidance in this rapidly changing area of law.

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