Two bills took effect in California earlier this month imposing further limitations on restrictive covenants in employment agreements, one of which voids noncompete agreements even if they are signed outside of the state.
While noncompete agreements are largely void in California, Senate Bill 699 expands the ways in which employees can challenge noncompete agreements. Specifically, the bill makes any agreement that restricts an employee’s ability to engage in a lawful profession, trade or business unenforceable regardless of where and when it was signed. It also prohibits employers from enforcing such agreements, even if the contract was signed and the employment was maintained outside of California in a state where noncompete agreements are valid. So, if an employee based in Maryland enters 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 in Maryland.
SB 699 also allows employees to sue for injunctive relief or the recovery of actual damages, or both, if an employer enters a contract that is void under California law or attempts to enforce a contract that is void under state law.
The other California law that took effect Jan. 1, Assembly Bill 1076, goes even further than SB 699, making noncompete provisions not just unenforceable but illegal. Specifically, it is now “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 exception.” AB 1076 codifies 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.
Employers are also required to notify current and former employees (employed after Jan. 1, 2022) in writing by Feb. 14, 2024, that any noncompete agreement or noncompete clause within an agreement signed by the employee is void, unless the agreement or clause falls within one of the statutory exceptions.
Employer Considerations
Given the new California laws’ 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 those that might be at risk and 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 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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