On Sept. 1, 2023, California enacted a new law (SB 699, to be codified at Cal. Bus. & Prof. Code sec. 16600.5) reiterating its non-compete ban contained in Section 16600 that is effective Jan. 1, 2024.
New Section 16600.5 provides that any contract that is void under Section 16600 is also unenforceable, regardless of when and where the contract was signed, and an employer or former employer cannot enforce or attempt to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California. In addition, Section 16600.5 provides that (1) an employer cannot enter into a contract with an employee that is void under Section 16600, (2) any employer doing so commits a civil violation (i.e., it is unlawful per se to commence an action to enforce an illegal non-compete agreement), and (3) an employee or prospective employee may bring an action to enforce this law for injunctive relief or the recovery of actual damages, or both, with attorney’s fees to prevailing employees, former employees, or prospective employees.
On Oct. 13, 2023, California also enacted a new law (AB 1076, to be codified at Cal. Bus. & Prof. Code sec. 16600.1) effective Jan. 1, 2024 that requires employers of California employees, by Feb. 14, 2024, to provide all (1) current employees and (2) former employees employed after Jan. 1, 2022, who were parties to unlawful non-compete clauses or agreements with written notice that such clauses or agreements are void. Notice must be in the form of a written individualized communication to the employee or former employee, delivered to their last known address and email address. A violation of this notice provision is an act of unfair competition pursuant to California’s Unfair Competition Law, Cal. Bus. & Prof. Code sec. 17200, which provides for a civil penalty.
As a background, California law voids contracts that restrain an employee from engaging in a lawful profession, trade, or business of any kind. Specifically, Cal. Bus. & Prof. Code sec. 16600 states, “[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The three statutory exceptions to the prohibition against such contracts are:
- Restrictive covenants entered into in connection with (a) the sale of the business’s goodwill, (b) an owner’s sale or disposal of all ownership interest in the business, or (c) an owner’s sale of (i) all or substantially all of the business’s operating assets and goodwill, (ii) all or substantially all of the operating assets of a division or subsidiary of the business plus the goodwill of that division or subsidiary, or (iii) all of the ownership interest in a subsidiary (Section 16601);
- Restrictive covenants entered into in connection with the dissolution of a partnership, or a partner disassociating from a partnership (Section 16602); and
- Restrictive covenants entered into in connection with the dissolution of, or the termination of a member’s interest in, a limited liability company (Section 16602.5).
Courts have also carved out certain limited exceptions, such as non-competes that apply during employment.
Several open questions remain regarding these new laws, including whether they apply to non-solicitation agreements. SB 699 refers to agreements “void under this chapter,” which may encompass prior case law holding that customer non-solicitation clauses are generally void. Further, while AB 1076 specifically refers to “noncompete” agreements (not agreements “void under this chapter”), the statute says that “[t]his section shall be read broadly.”
In light of these new laws, employers should consider conducting a privileged audit of employment agreements with existing and former employees employed after Jan. 1, 2022, in California to determine the scope and legality of existing restrictive covenants. Such audit should consider the existence of remote work arrangements – whether intentional or unintended. If AB 1076 notice is required, employers may need to be prepared to ensure that it is individualized, in writing, and sent to the last known address and email address of each affected employee by Feb. 14, 2024.
