NON-COMPETES INVALID IN CALIFORNIA
For many years, California has long disfavored restrictive covenants in employment agreements; California’s Business and Professions Code Section 16600 invalidates virtually any contract that includes a “restraint on trade” stating: “Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
With the passage two new bills, effective January 1, 2024, (SB 699 and AB 1076) it has confirmed, without question, that California has declared non-compete agreements not only void, and unenforceable but also unlawful, regardless of where and when the contract was entered into, except in a few narrow and limited circumstances.
SB 699 Contracts in Restraint of Trade
In passing SB 699, the Legislature stated several key points:
1. “California employers continue to have their employees sign non-compete clauses that are clearly void.”
2. “California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.”
3. “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.”
SB 699 was passed to address these issues. Specifically, as of January 1, 2024, SB 699 adds a new section to the Business and Professions Code (B&P Section 16600.5), implementing the following restrictions:
- Any contract that is void under B&P 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 regardless of whether the contract was signed and the employment was maintained outside of California.
- An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this chapter.
- An employer that enters into a contract that is void or attempts to enforce a contract that is void commits a civil violation. An employee, former employee, or prospective employee may bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages and is entitled to recover reasonable attorney’s fees and costs.
AB 1076 Contracts in Restraint of Trade: Non-Compete Agreements
There are three key points that employers must be aware of with the passage of AB 1076.
First, in passing this bill, the legislature codified the decision in the case Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, where the court interpreted Business and Professions Code 16600 to hold that non-compete agreements in an employment context are void, and non-compete clauses within employment contracts by which a person is restrained from engaging in a lawful profession, trade, or business of any kind is void, unless one of the narrow exceptions applied. AB 1076 now makes it more difficult for the courts to depart from the Edwards decision.
Second, with AB 1076, it is now unlawful to include a non-compete clause in an employment contract, or to require an employee to enter a non-compete agreement, unless an existing (narrow) exception applies. Previously, such agreements were void, meaning they were unenforceable in California. However, AB 1076 makes the inclusion of a non-compete clause or requiring an employee to enter a non-compete agreement an act of unfair competition under California Business and Professions Code Sections 17200 et seq. As a result, employers may face a civil penalty of up to $2,500 per violation.
Third, AB 1076 extends the reach of the prohibition on the restrictive covenant to include “contracts where the person being restrained is not a party to the contract.” While this provision is not entirely clear, a broad reading of this provision could be seen to include a prohibition on agreements between contracting parties that have the impact of restraining a third party from engaging in their chosen profession, trade, or business -such as contracts among competing businesses prohibiting the hiring of each other’s employees.
Lastly, there is a Notice requirement imposed upon employers to immediately notify any current or former employee who were employed after January 1, 2022 and whose employment agreement included a now-prohibited non-compete agreement that such clause is void.
Employers have until February 14, 2024, to notify current and former California employees who were employed after January 1, 2022, that any non-compete provision in their agreement is void.
- Notice is required to be sent to the employee’s last known mailing and email addresses.
- Failure to provide notice is an act of unfair competition, which may subject the employer to civil penalties up to $2,500 per violation.
- Notice is not required for lawful non-compete agreements that satisfy one of California’s narrow exceptions.
The notice requirement appears limited to “non-compete agreements,” and does not appear to require notice of other agreements or clauses such as non-solicitation and overbroad confidentiality provisions.
What should I do now?
- Audit employment agreements signed by current and former employees who were employed after January 1, 2022 to determine if their agreement included a now prohibited non-compete agreements.
- Notify, by February 14, 2024, all current/former employees whose employment agreement contained a non-compete clause that such clause is void and will not be enforced.
- Review and modify any form employment agreements or offer letters to delete any language that would violate SB 699 or AB 1076.
This Newsletter is intended as a brief summary of employment law. While every effort has been made to ensure the accuracy of the information contained herein, it is not intended to serve as “legal advice,” or to establish an attorney-client relationship. If additional information is needed on any of the topics contained herein, please contact our office. All rights reserved. ©2024.