Navigating California’s bans against non-compete clauses

In this second installment of our series discussing key topics of interest for general counsels (GCs) in California, we unpack ways GCs can plan ahead in light of new legislation passed in California regarding non-compete clauses.

New developments in California’s non-compete landscape

California’s long-standing non-compete law, California Business & Professions Code § 16600 (“§ 16600”), voids, with limited exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.” This statute “has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends.” Techno Lite, Inc. v. Emcod, LLC, 44 Cal.App.5th 462, 471 (2020) (quotations omitted).

Earlier this year, Governor Newsom signed Assembly Bill (AB) 1076 into law, which added a new § 16600.1, which bolsters California’s ban on non-compete agreements by making it “unlawful to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement[.]” Previously, such agreements were generally considered void, but not unlawful.

Senate Bill (SB) 699 was signed into law at the same time. It further expands the scope of § 16600 by making “[a]ny contract that is void under this chapter [] unenforceable regardless of where and when the contract was signed.” § 16600.5. This new section purports to extend protections by (1) making non-compete agreements entered into by employees with non-California employers void and (2) providing a private right of action for employees and prospective employees to bring suit based on current, former, or prospective employers’ violation of the statute. This means an employee or prospective employee can file suit in California asking for a declaration that her non-compete agreement with a non-California employer is void, thereby allowing the individual to work for her new, California employer. This private right of action allows employees to recover actual damages and reasonable attorney’s fees and costs if they prevail.

These laws potentially raise interesting questions for California companies, and below we flag a few areas for consideration.

Interaction between non-compete clauses and trade secrets

One motivation behind including non-compete clauses in employment agreements was to ensure that trade secrets would not be shared with competitors. Based on the language within the laws and case law thus far, it appears that trade secret protections remain intact. Although § 16600 “bars a court from specifically enforcing (by way of injunctive relief) a contractual clause” banning non-competes, “a court may enjoin tortious conduct (as violative of either the Uniform Trade Secrets Act and/or the Unfair Competition Law).” The Retirement Group v. Galante, 176 Cal.App.4th 1226, 1238 (2009). Employers can also include “properly drawn confidentiality agreement[s]” in employment agreements to protect their confidential information, including their trade secrets. Brown v. TGS Mgmt. Co., LLC, 57 Cal.App.5th 303, 319 (2020). While California employers generally cannot rely upon contractual clauses to protect their trade secrets by banning solicitation of customers or banning employees from working at a competitor after their employment ends, employers can still craft confidentiality clauses to protect their information and utilize trade-secret laws to guard their trade secrets.

What about forum selection and choice of law clauses?

Just about every employment agreement contains forum selection and choice of law provisions. An employer might wonder whether strategically using forum selection and/or choice of law clauses requiring employees to litigate their claims outside of California could place California employees beyond the protections of SB 699. Based on our review so far, that approach seems likely to be unsuccessful in most cases.

California Labor Code § 925 (§ 925) restricts employers’ ability to draft around California labor laws, including non-compete provisions. This section states that “employers shall not require employees who primarily reside and work in California to agree to (i) adjudicate outside of California a claim arising in California or (ii) deprive the employee of the substantive protection of California law in a controversy arising in California.” This law does include a carveout, however, for employees represented by counsel in negotiating the forum-selection and choice-of-law provisions.

As noted in the above language, § 925 protects only those employees who “primarily reside and work” in California. For instance, a California district court found that, although an employee was a California resident, he could not void the forum selection clause in his employment agreement under § 925 because the evidence indicated he worked in California only around 20% of the time. The court found that working in California 20% of the time did not constitute “work[ing]” in California as required by the statute. Bromlow v. D & M Carriers, LLC, 438 F. Supp. 3d 1021 (N.D. Cal. 2020). With the emergence of remote work, this will be particularly important as a remote worker for a California employer who resides outside of California most likely will not be protected by § 925.

But it remains possible that remote workers “working” outside of California but reporting to a California location may still try to utilize California’s non-compete protections while in non-California courts. For example, a Delaware Chancery Court found an employment agreement’s choice of law provision selecting Delaware law to govern the non-solicitation and non-compete clauses was unenforceable because the conflict of laws factors weighed in upholding California’s laws. Nuvasive, Inc. v. Miles, 2019 WL 4010814 (Del. Ch. Aug. 26, 2019).

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GCs should keep these considerations in mind if and when faced with new employees who have employment agreements with non-California employers that include both a non-compete clause and a choice of law or forum selection clause.