California Law Further Restricts Employee Noncompete Agreements

Published January 4, 2024

By Shaye Schrick and Mark Marsenovic

California Business and Professions Code section 16600 voids agreements that restrain individuals from engaging in a lawful profession, trade, or business.  Contracts that limit such conduct are known as noncompete agreements and they are generally unenforceable in California subject to specific statutory exceptions.  Senate Bill 699 and Assembly Bill 1076—which take effect on January 1 and amend and/or add California Business Code sections 16600, 16600.1, and 16600.5—take the state’s noncompete prohibition several steps further by impacting agreements executed outside California, imposing notice requirements on employers, and providing remedies to employees for violation of noncompete laws.

Senate Bill 699

On September 1, 2023, Governor Newsom signed Senate Bill (“SB”) 699, expanding California’s noncompete standard to apply not only to agreements executed within California but to all agreements regardless of where and when the contract was signed.  Accordingly, if an employer and employee execute a noncompete agreement in another state, the agreement will be deemed void in California even if it remains lawful in the state where it was executed, potentially subject to a choice-of-law analysis.  SB 699 further prohibits an employer from entering into an agreement with an employee or prospective employee that includes an unlawful noncompete provision.

California’s intent in preventing the formation of such agreements from the get-go is to prohibit employers and prospective employers from using unlawful noncompete clauses, which “can have a chilling effect on employee mobility and stifle economic development.” Effectively, the Legislature’s intent is to prevent employers from using such clauses to create the illusion that an employee is legally bound by such restrictions, which may then impact their post-employment conduct based on that belief even where the provision was not legally enforceable.

SB 699 further authorizes current, former, and prospective employees to bring an action against a current, former, or prospective employer to enforce these provisions, and provides for recovery of actual damages and/or injunctive relief in addition to reasonable attorneys’ fees and costs.

Assembly Bill 1076

On October 13, 2023, Governor Newsom signed Assembly Bill (“AB”) 1076, codifying case law established in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, which held that noncompete agreements are void in the employment context “even if . . . narrowly tailored” unless they fall within an applicable exception.  Under AB 1076, this limitation applies to all agreements, not just those where the person being restrained is a party to the contract.  In doing so, the bill makes it unlawful for an employer to include a noncompete clause in an employment contract, or to require an employee to enter a noncompete agreement, that does not satisfy specified exceptions.

In addition, AB 1076 requires all employers who have agreements that include noncompete provisions to notify current employees, and all former employees who were employed after January 1, 2022, that noncompete clauses and/or noncompete agreements applicable to them are void.  This notice must be provided in an individualized written communication to each applicable current and former employee by February 14, 2024, and must be delivered to the last known address and the email address of the employee or former employee.

AB 1076 further provides that a violation of its provisions amounts to an act of unfair competition pursuant to California’s Unfair Competition Law, Business and Professions Code section 17200 et seq., and entitles prevailing litigants to related relief, including restitution and injunctive relief.

Conclusion

With the new year just around the corner, and the February 14, 2024 notice deadline arriving shortly thereafter, employers should immediately review all relevant agreements for noncompete provisions which have been in place since January 1, 2022, provide notice to affected employees (current and former) in advance of the deadline, and decide how best to address both existing and new agreements going forward. Employers should consult legal counsel regarding these obligations.


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