California passes new noncompete legislation

California has passed two new laws set to go into effect next year that reaffirm and expand the State’s “strong public policy” prohibiting agreements that restrain individuals from “engaging in a lawful profession, trade, or business of any kind.” Under Section 16600 of the California Business and Professions Code, these agreements – generally referred to as noncompete agreements – are already considered void under California law. However, the two new laws under the same chapter will also expose to liability employers who have noncompete clauses and other restrictive covenants in their contracts.

Senate Bill (SB) 699

As to the first law, California Gov. Gavin Newsom recently signed SB 699, which will go into effect on Jan. 1, 2024. SB 699 will be codified as Section 16600.5 of the California Business and Professions Code. The Legislative findings included in the bill provide some of the impetus for its drafting and passage: specifically, “California employers continue to have their employees sign noncompete clauses that are clearly void and unenforceable under California law. Employers who pursue frivolous noncompete litigation has a chilling effect on employee mobility.” The findings go on to state that over the past two decades, noncompete clauses have caused increasing harm such as stifled economic development, lacking innovation, and diminished growth, especially due to California employers “increasingly fac[ing] the challenge of employers outside of California attempting to prevent the hiring of former employees.”

The bill makes it unlawful for employers to enforce noncompete agreements considered void and unenforceable under Section 16600, irrespective of where the agreement was signed and irrespective of where the worker was employed when he or she executed the agreement. As such, California’s prohibition on noncompete agreements would apply to any out-of-state employer that attempts to enforce such an agreement in California. Further, an employer who attempts to enforce a noncompete contract that is void would be committing a “civil violation.” The law allows “an employee, former employee, or prospective employee [to] bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages, or both” as well as “reasonable attorney’s fees and costs” for a prevailing employee (including a former or prospective employee).

This attempt by the California legislature to extend its reach beyond the boundaries of the State may be struck down. For example, in Lett v. Paymentech, Inc., 81 F. Supp. 2d 992 (N.D. Cal. 1999), the Northern District of California invalidated a portion of the California Labor Code requiring employers without a fixed place of business in the State enter into written contracts with commission-based employees. The Court ruled that the law was overly burdensome on interstate commerce in violation of the Commerce Clause and facially discriminatory. Thus, it remains to be seen how courts will respond to the new law.

Assembly Bill (AB) 1076

Second, AB 1076 – set to go into effect January 1, 2024 – will codify the 2008 California Supreme Court decision in Edwards v. Arthur Andersen LLP in Section 16600.1 of the California Business and Professions Code and void noncompete agreements in employment no matter how narrowly tailored. In Edwards, the Court rejected an invitation to relax the statutory restrictions of Section 16600, clarifying “that section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat.” AB 1076 also amends Section 16600 to expressly state that its prohibitions apply even where the individual being restrained from engaging in a lawful profession, trade, or business is not a party to the contract. Further, AB 1076 would also make it unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, which does not satisfy the specified exceptions of Section 16600. Employers will have to notify current and former employees – specifically those who were employed after Jan. 1, 2022 – in writing by Feb. 14, 2024, that any noncompete agreements that they had previously reached in violation of AB 1076 are void. That notice must be made in a written, individualized communication delivered to the last known address and email address of the employee.

Implications for employers

It is imperative for employers both inside and outside of California to be aware of these bills, specifically SB 699 which will soon be law and has extraterritorial implications. Attempting to enforce noncompete agreements within California may expose current and former employers to liability.

Employers should confer with counsel regarding agreements with current and former employees to determine whether any contain provisions, including non-solicitation agreements, that may be considered “restraints on trade.” Given California’s statutory reaffirmation of its “strong public policy” against noncompete agreements, seemingly innocuous provisions might be considered as intending to restrain individuals from engaging in a profession or business. No longer simply being considered void, some of these clauses may now expose employers to liability under SB 699, which affords plaintiffs entitlement to damages and attorneys’ fees. As a result of this review, employers might need to revise their current offer letters, confidentiality agreements, and other employment-related documentation.

Employers also must now establish a procedure and designate personnel to provide the required notice under AB 1076 by Feb. 14, 2024. This will involve identifying current and former employees (i.e., those employed anytime after Jan. 1, 2022) who may be subject to a noncompete clause, including employees residing in California (even if the employer has no physical operations in the state) as well as former employees who have moved to California since their employment.