California Expands Prohibition Against Non-Competes

On September 1, 2023, California Governor Gavin Newsom signed into law SB 699, which amends California Business & Professions Code Section 16600 to prohibit employers from entering into, or attempting to enforce, post-employment non-compete agreements regardless of whether the contract was signed outside of California. SB 699 will be codified as Section 16600.5 of the California Business and Professions Code and goes into effect on January 1, 2024.

Also under consideration (passed by the California legislature, but not yet signed or vetoed by Gov. Newsom) is AB 1076, which would require employers to notify current and former employees any noncompete agreements they may have signed are void.

Together, SB 699 and AB 1076 are reflective of a nationwide push to significantly restrict—or ban outright—non-compete agreements and other restrictive covenants in employment.

SB 699

It is well understood that California law already bans all post-employment non-compete agreements, subject to limited exceptions (e.g., the sale of a business, the dissolution of a partnership, or upon the dissolution or termination of interests in a limited liability company). Indeed, Section 16600 expressly states 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.” SB 699 is significant because it expands the restrictions on non-compete agreements to contracts entered into outside of California or enforced in California as follows:

1. Any contract that is void under Section 16600 is unenforceable regardless of where and when the contract was signed.
   
2. Employers and former employers are prohibited from enforcing a contract in California “that is void regardless of whether the contract was signed and the employment was maintained outside of California.”
   
3. Employers are prohibited from “enter[ing] into a contract with an employee or prospective employee that includes” a void non-compete provision.
   
4. The law provides that an employer who violates the law commits a “civil violation,” allowing current, former and prospective employees to pursue a private right of action to enforce the law and seek injunctive relief, damages and attorneys’ fees and costs.

While the impact of these new restrictions remains to be seen, given the breadth of SB 699, it will likely result in a new wave of legal battles involving novel jurisdictional and constitutional challenges.

For example, if an employee based in a jurisdiction where non-competes are facially enforceable enters into a compliant agreement with an employer in that jurisdiction and then relocates to California to work for a competitor, it would seem that the prior employer could not successfully enforce the non-compete in a California court. Or consider a California business that employs an out-of-state fully remote worker in a jurisdiction in which non-competes are enforceable and requires that employee to enter into a non-compete governed by that state’s law. In that case, SB 699 would seemingly require a California court to deem the agreement unenforceable; the employer would be better served seeking judicial relief in the state where the employee is located in order to receive more favorable judicial treatment. In 2017, California attempted to limit employers’ ability to move non-compete and other employment-related disputes out of state through California Labor Code Section 925, which prohibits employers from requiring a California employee to agree to out-of-state choice-of-law and venue provisions except when specifically negotiated by the employee’s legal counsel. But that law applies only to employees who “primarily reside and work in California” and has not been interpreted to reach across state lines.

AB 1076

Another bill on noncompete agreements has worked its way through the state legislature and is pending signature or veto by the Governor. AB 1076 would add a provision to Section 16600 that purports to codify the 2008 California Supreme Court decision in Edwards v. Arthur Andersen LLP and void noncompete agreements in employment “no matter how narrowly tailored.” In the Edwards case, the California high court ruled that even a narrowly drawn noncompete agreement that does not completely prohibit a former employee from engaging in the former employee’s profession, trade, or business, still violates Section 16600 unless the agreement specifically falls within one of the statute’s narrow exceptions.

Additionally, AB 1076 would impose a burdensome notification requirement on employers. It would require employers to notify current and former employees in writing, by February 14, 2024, that any non-compete agreements they are subject to are void.

Conclusion

SB 699 and AB 1076 (if enacted into law) significantly bolster California’s prohibition against non-compete agreements. California is not alone in its opposition to non-compete agreements: North Dakota, Oklahoma and, most recently, Minnesota, have also enacted legislation to curtail the use of non-compete agreements. In addition, the Federal Trade Commission has proposed a nation-wide ban on non-compete agreements, as we previously reported on here. Given these developments, employers with any nexus to California should review their employment agreements, including any non-compete agreements, and contact experienced counsel for guidance.