In July, we wrote about a bill passed by the New York State Assembly which, if signed by the governor, will prohibit nearly all noncompete agreements for workers in New York. We also wrote about a Minnesota law that went into effect in July, banning nearly all post-employment noncompetes entered into on or after July 1, 2023. As the attack on noncompetes continues at the federal and state levels, California Gov. Gavin Newsom recently signed legislation to amend California’s noncompete law, further expanding the state’s ban on restrictive covenants. Among other changes, once the amendment takes effect on January 1, 2024, noncompete agreements will be void in California even if they are signed outside of California.
What’s New
California has long banned noncompete agreements. Under CA Business and Professions Code Section 16600, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The new amendment to this law, SB 699, takes the ban a couple of steps further by adding the following restrictions:
- Any contract that is void under Section 16600 is unenforceable regardless of where and when the contract was signed.
- An employer or former employer shall not attempt to enforce a contract that is void under Section 16600 regardless of whether the contract was signed and the employment was maintained outside of California.
- An employer shall not enter a contract with an employee or prospective employee that includes a provision that is void under Section 16600.
- An employer that enters a contract that is void under Section 16600 or attempts to enforce a contract that is void under Section 16600 commits a civil violation.
- (1) An employee, former employee, or prospective employee may bring a private action to enforce Section 16600 for injunctive relief or the recovery of actual damages, or both; (2) In addition to the remedies described in paragraph (1), a prevailing employee, former employee, or prospective employee in an action based on a violation of Section 16600 shall be entitled to recover reasonable attorney’s fees and costs.
Key Takeaways
Crossing State Lines
Once in effect, SB 699 will prohibit enforcement of a noncompete agreement that violates California’s noncompete law, regardless of when and where the agreement was signed and regardless of whether the employee was employed outside of California. Under the expanded restrictions, if an employee based in Maryland, for example, entered into a noncompete agreement with a Maryland employer but later went to work for a California-based employer in violation of the agreement, the Maryland employer could not enforce the agreement against the employee or the California employer even if the employee remained based in Maryland. Doing so will be considered a violation of SB 699. According to the state legislature, this is in line with California’s public policy against restraint of trade law that “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.”
Expanded Employer Liability
The amendment also notes, “research further shows that 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.” To combat this issue, SB 699 provides that employers may not enter a contract with a current or prospective employee that contains a void covenant under California’s noncompete law, and any employer who enters or attempts to enforce such a contract commits a civil violation.
Private Rights of Action
SB 699 also creates a private right of action for aggrieved employees to sue employers that violate the law. This includes employers who require employees to sign unenforceable noncompetes, whether the employer is based in or outside of California. Before the enactment of SB 699, employees did not have a private right of action against employers under section 16600 for the inclusion of restrictive covenants in employment agreements. Now, SB 699 will allow prospective, current and former employees to bring a private action for injunctive relief, actual damages or both. Additionally, under the amendment, employees who are successful in challenging a restrictive covenant will be entitled to recover reasonable attorney’s fees and costs.
Other California Legislation Restricting Noncompetes
Another proposed California law addressing noncompete agreements could impact employers further. If passed, AB1076 would codify a 2008 California Supreme Court case, Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, which held that noncompete agreements in an employment context and noncompete clauses within employment contracts are void no matter how narrowly tailored the agreement is, unless an exception applies. The bill “would also make it unlawful 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.” If passed, employers would also be required “to notify current and former employees in writing by February 14, 2024, that the noncompete clause or agreement is void, as specified.”
Considerations for Employers
Given SB 699’s broad application, employers in all states should be on notice of the increasingly serious implications for violating California’s law on noncompetes. Consequently, employers in all states can be proactive and gather information about their use of various noncompete agreements to help identify agreements that might be at risk, and should proceed with caution when requiring employees to sign, or attempting to enforce, otherwise unenforceable restrictive covenants if the employee works in California or for a California-based employer. Employers should also consider alternative strategies to protect their confidential information, customers and employees in the event their agreements are nullified in the future. Stay tuned for more updates as more jurisdictions address noncompetes.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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