A review of significant developments, cases, and verdicts throughout the United States in trade secrets law
The legal landscape in 2023 continued a sea change in the arena of noncompete law, at both federal and state levels. California was no exception. California has well-established public policies heavily favoring employee mobility and disfavoring any restraints on trade. To that end, in 2023, the California legislature passed two key laws (SB 699 and AB 1076) that significantly expanded California’s ban on noncompete agreements.
SB 699
California law already voided noncompete provisions, with a few exceptions, but the California legislature took it a step further in passing SB 699. It became effective as of Jan. 1 and represents a significant departure from previous noncompete law in California in two respects. First, SB 699 explicitly bars employers from not only enforcing noncompete provisions but also entering into noncompete provisions or agreements with an employee or prospective employee. Further, this broad prohibition applies to California employees regardless of whether the employee signed the agreement outside of California or worked outside of California. For example, an employee signs a noncompete agreement while working for Company A in Michigan, but subsequently moves to California and continues working for Company A; this agreement is unenforceable per SB 699.
Second, SB 699 creates a private right of action to enforce this recent noncompete prohibition. Meaning, prospective, current, or former employees now have the right to sue an employer who enforces or enters into a non-compete agreement, seek an injunction, and collect attorney’s fees. Previously, individuals were unable to seek damages under B&P 16600, and instead were limited mostly to seeking declaratory relief from the court that the alleged non-compete provision was void.
AB 1076
Also, effective Jan. 1, AB 1076 complements SB 699 and declares that noncompete provisions are not only void, but unlawful. Furthermore, AB 1076 codified Edwards v. Arthur Andersen LLP in specifying that this section is to be “broadly” construed to void the application of any non-compete agreement or clause in an employment context. In codifying this case, the California legislature clarified that all noncompete agreements are void (regardless of whether the provision is narrowly drafted). AB 1076 also applies to contracts where the restricted party is not a party to the contract. Although the legislature did not elaborate, this provision could be read to prohibit businesses from entering into contracts with each other which include noncompete or other similar provisions that impermissibly restrain any of their employee’s profession, business, or trade.
AB 1076 includes a new notice requirement for employers. By Feb. 14, employers must notify current employees, or former employees employed after Jan. 1, 2022, whose contracts include a noncompete clause or entered into a noncompete agreement that the noncompete clause or agreement is void. Employers must send “individualized communication[s]” to the employee or former employee at his or her last known address and email address. Employers failing to comply with these notice requirements commit an act of unfair competition and are subject to a civil penalty up to $2,500 per violation.
Implications for Employers
In light of California’s new noncompete laws, California employees are well-advised to seek the assistance of legal counsel to review their agreements, offer letters, or other documents for noncompete provisions or restraints of similar impact that may restrict their employees. Multistate employers from other more permissive states should also pay particular attention to agreements impacting California employees. On or before Feb. 14, employers should determine whether they are mandated by the new law to notify current and former California employees (employed after Jan. 1, 2022) that they signed a noncompete agreement, and that the agreement is void as a matter of law.
