Non-compete agreements have long been disfavored under California law. Section 16600 of the California Business and Professions Code provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void,” except under limited statutory exceptions. California courts have historically applied this statute to invalidate non-compete agreements with certain limited exceptions.
Recently, California Governor Gavin Newsom further buttressed the state’s protections of employee mobility by signing Senate Bill 699 and Assembly Bill 1076 into law.
SB 699, which Governor Newsom signed on September 1, 2023, extends California’s restriction on non-compete agreements to contracts “regardless of where and when the contract was signed.” We expect courts to address challenges to the statute, including whether it applies retroactively to any non-compete agreement, and whether and in what context it applies outside of California.
AB 1076, which Governor Newsom signed on October 13, 2023, codifies the 2008 California Supreme Court decision Edwards v. Arthur Andersen LLP and makes it unlawful to include a non-compete clause in an employment contract that does not satisfy one of the statutory exceptions.
Both laws go into effect on January 1, 2024.
SB 699 extends the reach of California’s restriction on non-competes to contracts signed out of state. Specifically, SB 699 adds section 16600.5 to the California Business and Professions Code, which provides:
The Legislature expanded these restrictions given that, among other things: (a) “as the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees”; (b) “California courts have been clear that California’s public policy against restraint of trade law 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”; and (c) “California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence.”
SB 699 creates a private right of action for employees, former employees, and prospective employees seeking to enforce this law through injunctive relief or actual damages and entitles a prevailing employee to reasonable attorneys’ fees. The law, on the other hand, does not entitle employers who prevail in litigation to recover attorneys’ fees. The law further states that an employer who enters into or attempts to enforce a non-compete agreement that is void under the law has committed a “civil violation.”
AB 1076 codifies existing case law by specifying that section 16600 must be broadly construed to void any non-compete agreement in an employment context, no matter how narrowly tailored, unless it satisfies one of the specified statutory exceptions. The statutory exceptions to section 16600 are for the sale of a business or the dissolution of a partnership or limited liability company.
The Legislature stated that AB 1076 is not meant to be a change in law, but is a declaration of existing law by codifying the California Supreme Court decision in Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008). There, the court held that even a narrowly drawn non-compete agreement that does not completely restrain a former employee from engaging in his or her profession, trade, or business still violates section 16600, unless the agreement falls within one of the specific statutory exceptions.
AB 1076 extends the applicability of section 16600 to contracts where the person being restrained is not a party to the contract. The law also provides that it is unlawful to include a non-compete clause in an employment contract, or to require an employee to enter a non-compete agreement, that does not satisfy one of the specified exceptions.
Of particular note for employers is the notification requirement imposed by AB 1076. Specifically, the law requires that employers provide written notice by February 14, 2024, to current employees and former employees who were employed after January 1, 2022, and whose contracts include a non-compete clause or who were required to enter a non-compete agreement that does not satisfy a statutory exception, that the non-compete clause or agreement is void.
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