New Legislation Extends California Noncompete Ban to Agreements Signed Outside the Golden State and May Impose Notice Obligations that Apply Retroactively
As we’ve previously written, California already takes a strong position against employee noncompete agreements. State law bans such agreements (with extremely limited exception) and imposes significant penalties on employers who nonetheless require workers to execute such provisions.
Recently, the Golden State took steps to expand its restriction on noncompetes even further to enable California courts to use California law to invalidate restrictive covenants that might otherwise be enforced in the states in which they were signed, where the employee is located, and/or where the employee resided at the time of the signing. Specifically, on September 1, 2023, Governor Gavin Newsom signed Senate Bill 699, which prohibits employers from entering into a contract with an employee or prospective employee that includes a provision “by which a person is restrained from engaging in a lawful profession, trade, or business of any kind, except as otherwise provided.” The new measure, which takes effect on January 1, 2024, adds Section 16600.5 to the California Business and Professions Code and has some support in existing California case law.1 The very limited exceptions provided by the statute concern restrictive covenants in the sale or dissolution of corporations, partnerships, and limited liability corporations, so those exceptions likely would not apply to the majority of existing noncompetes between employers and non-shareholder employees.
The bill establishes that an employer who violates that law commits a civil violation and authorizes an employee, former employee, or prospective employee to bring an action to enforce that law for injunctive relief or the recovery of actual damages, or both, and provides that a prevailing employee, former employee, or prospective employee is entitled to recover reasonable attorney’s fees and costs if the lawsuit is successful.
Importantly for employers everywhere, Section 16600.5 renders noncompete provisions and agreements void — including any agreement or provision that is arguably akin to a noncompete provision, such as a non-solicitation or no-poach agreement — regardless of where they were initiated or signed. In effect, Senate Bill 699 makes California a safe haven for employees seeking relief from a noncompete that would otherwise be enforceable in a different state. In other words, if a non-California based employer hired an employee living and working in another state and asked him or her to sign a noncompete agreement, and that employee later moves to California, the noncompete agreement will no longer be enforceable against the individual. The reach of this new law doesn’t end there — it also applies to agreements between a California-based employer and employees residing outside of California in states where noncompete agreements have traditionally been enforced.
In addition to Section 16600.5, all signs point to Governor Newsom signing into law Assembly Bill 1076, which was passed unanimously by the California State Assembly in May 2023. A.B.1076 essentially clarifies that Section 16600 of California’s Business and Professions Code should be interpreted broadly to ensure that, with very limited exception, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
In addition, the law will require employers to notify current and former employees in writing by February 14, 2024, of any noncompete agreements they signed which are now void. Noncompliance with this requirement carries civil penalties.
If Governor Newsom signs A.B. 1076 into law as expected, the implications for companies and employees are significant and include the following key considerations:
- Scope of Covered Agreements: The broad language of the law implies that not only noncompete and non-solicitation agreements but also other agreements, such as no-recruit and extensive nondisclosure agreements, may be affected. This potentially includes joint venture agreements and confidentiality agreements related to mergers or acquisitions that prohibit hiring each other’s employees.
- Retroactivity: The law, when enacted on January 1, 2024, will have a retroactive effect. Existing restrictive covenants will need prompt attention and likely revision or revocation. Companies will also need to assess logistics for efficiently and effectively providing formal notice to current and former employees regarding any noncompete agreements that they entered into with the company which will be void moving forward.
- California-Based Companies: Companies incorporated or with their principal place of business in California may find themselves unable to use various restrictive covenants, not just within the state, but anywhere. They will need to act swiftly to revoke existing agreements and inform affected parties. A key consideration for California companies without operations or employees in the State will be whether to relocate their principal place of business elsewhere.
- Companies Outside California with Employees in California: Companies incorporated or with their principal place of business outside California with employees based in California will need to develop compliance plans. Decisions will have to be made regarding which employees will receive notifications and how to handle no-recruit and confidentiality agreements.
- Companies Outside California with Employees Outside California: It seems as though this new bill is designed to attempt to interfere with employment agreements in which none of the parties, at the time of signing, are in California. There is risk that a company outside of California could be deemed to be subject to the notice requirements by an employee’s move to California subsequent to signing an agreement, which notice would have needed to be provided long before the company had any idea of the facts requiring the provision of that notice.
While the ultimate impact of this legislation remains uncertain, it is likely that legal challenges will arise in response to its implementation. The future landscape of employment agreements in California and the potential ripple effects on non-California-based companies are poised for significant change.
If you are an employer that may be affected by California’s latest legislation concerning noncompetes, you should consult with experienced employment counsel to ensure that your company is in compliance when the new laws take effect next year. If you are concerned about your legal rights in California with respect to former employees suspected of misappropriating confidential information to compete with your company, the authors of this article previously authored Protecting Trade Secrets In States That Disfavor Noncompetes, which covers best practices to protect against unfair competition by former employees, given California’s ever-changing legal landscape.
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Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 320 (2020) (finding overly broad confidentiality provision violated section 16600).
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