California sinks its teeth into noncompete agreements prohibition

California’s public policy has supported open competition and opposed restraints on employees’ practice of their trades since 1872. It later codified its public policy, first in Civil Code § 1637 (since repealed) and later in Bus. & Prof. Code § 16600. For decades, California courts have held that noncompete contracts are not enforceable in strictly employment contracts. Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 945 (2008). California courts have also upheld a Tameny claim for wrongful termination in violation of its “fundamental” and “substantial” public policy “in favor of open competition and employee mobility.” Silguero v. Creteguard, Inc., 187 Cal.App.4th 60, 66-67 (2010).

But when Governor Newsom recently signed Senate Bill (“SB”) 699, effective Jan. 1, 2024, California added much needed teeth to enforce its public policy.

The new 2024 law, to be codified as Bus. & Prof. Code § 16600.5, makes previously void noncompetition agreements unenforceable “regardless of where and when the contract was signed” (SB 699). SB 699 prohibits employers and former employers from even attempting to enter into a void noncompetition contract “regardless of whether the contract was signed and the employment was maintained outside of California,” and establishes that such prohibited employer actions constitute a “civil violation” under the new statute.

More importantly, SB 699 empowers an “employee, former employee, or prospective employee” to file a civil suit for injunctive relief, actual damages, and reasonable attorneys’ fees for prevailing against anyone trying to enforce such a void contract.

This new law will be a much more effective tool than a lawsuit merely seeking a declaration that the noncompete clause is void, which has been the primary litigation enforcement tool available until now. The costs of declaratory relief actions likely interfered with encumbered employees finding legal representation.

But SB 699 is a double-edged sword for employers. On the one hand, it enables employees to sue their current or former employers if they try to enforce a void noncompetition agreement. This creates a substantial obstacle for employers utilizing a void noncompetition clause to dissuade employees or ex-employees from working for a competitor. On the other hand, SB 699 also helps the hiring employer who finds a talented recruit is burdened by a former (or current) employer’s noncompete clause because that clause can now be challenged in a civil suit. This is an incentive for the hiring employers to be less reluctant to recruit talent from competitors.

California’s Legislative Goals

The Legislative goals are clearly stated in the Bill Text, thus providing a roadmap for smart lawyers who will file the new lawsuits. California legislators found “noncompete clauses in employment contracts” so common in the United States, that one in five of all workers nationwide, approximately 30 million people, are currently subject to such void clauses. “Employers who pursue frivolous noncompete litigation has (sic) a chilling effect on employee mobility.” (Bill Text.)

Further, the Legislature found through empirical research that “the harm of noncompete clauses and other contract clauses involving restraint of trade to pursue one’s profession has been accelerating” in the last two decades and is “associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.” (Id.)

The Nation Is Working Remotely

As of 2023, 12.7% of full-time employees work from home, while 28.2% work a hybrid model, illustrating the rapid normalization of remote work environments. More than 4.7 million people work remotely at least half the time in the United States, and 70% of the workforce is expected to work from home at least five days a month by 2025. Another 37% of Americans will be working from home full-time by 2025. (Multiple Google searches.) The Bureau of Labor Statistics found that 27% of the U.S. workforce worked remotely as of mid-2022, but some academic surveys say the figure is closer to 50%. (“How many Americans are really working remotely?” by Dylan Walsh, MIT Management Sloan School, 2023.) This is a significant pool of potential litigants from all over the country.

“[T]he market for talent has become national and remote work has grown,” thus forcing California employers to “increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.” (Bill Text.)

California has thus expressly declared that its “public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside of California and working for a non-California employer.” (Bill Text.) It is difficult to imagine that any other state could articulate an equally compelling interest in enforcing noncompete clauses signed in their states, when the real issue is the enforceability of those same clauses by employees seeking work from California employers.

What could be a more fundamental public policy than California’s right to seek highly qualified workers from a national pool to perform much needed services for California employers? Some observers believe that there is a national push to prohibit noncompete agreements and other restrictive covenants in employment agreements. California remains at the forefront of this push.

The impact of S.B. 699 will be felt most acutely by California’s tech giant employers, such as Apple, Cisco Systems, Intuit, Oracle, Uber and Hewlett Packard Enterprise. But start-ups will be impacted as well. The civil suit floodgates against noncompete agreements may open in 2024.