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September 21, 2023
Background
California already prohibits most post-employment restrictive covenants. Section 16600 of the California Business and Professions Code provides that “every contract by which any one is restrained from engaging in the lawful profession, trade, or business of any kind is to that extent void.” The statute permits the enforcement of restrictive covenants only in three limited situations: (1) the sale of a business; (2) the dissolution of a partnership; and (3) upon the dissolution or termination of interests in a limited liability company. See Sections 16601, 16602, and 16602.5. In addition, California courts will enjoin the solicitation of clients where the former employee has stolen an employer’s confidential or proprietary information to do so.
California Casts an Even Wider Net Against the Enforcement of Restrictive Covenants
On September 1, 2023, Governor Newsom signed Senate Bill 699 (“SB 699”), which includes additional prohibitions against restrictive covenants and a new section to the California Business and Professional Code (namely, Section 16600.5). Specifically, SB 699 adds to the existing law that: (1) a restrictive covenant that is void under Section 16600 is unenforceable regardless of where and when it was signed; (2) an employer cannot attempt to enforce a restrictive covenant that is void under Section 16600 regardless of whether the contract was signed and the employment was maintained outside of California; and (3) an employer cannot enter into a contract with an employee or a prospective employee that includes a provision that is void under Section 16600. This law is set to take effect on January 1, 2024.
SB 699 sets forth the California Legislature’s rationale for these new prohibitions. The California Legislature found that non-compete agreements are extremely common in the United States, with approximately one out of every five employees being subject to one, and that they “stifle economic development, limit firms’ ability to hire and depress innovation and growth.” The California Legislature also noted that California employers continue to have their employees sign non-compete agreements – even though they are unenforceable – in an effort to have a “chilling effect on employee mobility.” In addition, the California Legislature found that non-compete agreements entered into in other states make it challenging for California employers to hire those employees, thus impacting employment in California. Finally, the California Legislature noted that California has a clear public policy against the restraint of trade and a strong interest in protecting employees’ freedom of movement.
Consequences of Violating the Statute
SB 699 provides that an employer who enters into or seeks to enforce a restrictive covenant that is void under the statute commits a civil violation. An employee, a former employee, or a prospective employee is now entitled to bring a private action under the statute for injunctive relief, the recovery of actual damages, or both. Significantly, in addition to these remedies, a prevailing employee, former employee, or prospective employee is also entitled to recover reasonable attorney’s fees and costs.
Employer Take-Aways
Restrictive covenants, except in limited situations, have been unenforceable in California for some time now. However, this new law expands the scope of the prohibited conduct and imposes remedies for violations. In addition, this new law is revolutionary in that it has the effect of invalidating restrictive covenants that employees executed in other states when the employee now lives or works in California and the employer is seeking to enforce that contract in California. This effect will likely lead to litigation in the coming years.
At this time, California appears to be focused only on attempts to restrain conduct or services within its borders, and not in another state. In this regard, in SB 699, the California Legislature found that “California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California…. ” and “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….” (emphasis added). However, employers should keep an eye on this law and periodically check with counsel to determine how it evolves.
In the meantime, California employers should review their employment agreements to make sure they comply with this new law. Out-of-state employers may also wish to do so. Finally, before taking any action to enforce (or oppose) a restrictive covenant in California, employers should seek the advice of counsel.
The author of this article, Maria V. Martin, is a member of the Bars of New Jersey, New York, Ohio, and Pennsylvania. This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice in California, New Jersey, New York, Ohio, Pennsylvania, or any other jurisdiction, nor does it establish an attorney-client relationship with any reader of the article where one does not exist. Always consult an attorney with specific legal issues.
