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November 1, 2023
The Background
California has long disfavored restrictive covenants in employment agreements. California Business and Professions Code Section 16600 renders void any contract that restrains someone from engaging in a lawful profession, trade, or business. However, the law allows for restrictive covenants in three circumstances: (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 are inclined to enforce non-solicitation covenants where a former employee has misappropriated an employer’s confidential or proprietary information to solicit the employer’s customers or coworkers. Except in these limited situations, restrictive covenants in employment agreements have typically been unenforceable in California.
California now has enacted new laws to further limit the enforceability of restrictive covenants and to increase employers’ liability for attempting to impose them. On September 1, 2023, Governor Newsom signed Senate Bill 699 (“SB 699”), which added Section 16600.5 to the Code and will take effect on January 1, 2024. We discussed SB 699 in our article here. Section 16600.5 has four key components: (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; (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; and (4) a violation of this Section is a civil violation and an employee, former employee, or prospective employee can bring an action for injunctive relief, damages, and attorney’s fees and costs. Given its language, SB 699 presumably has the effect of invalidating restrictive covenants that employees executed in other states (and that were valid in those other states) when the employee now lives or works in California and the employer is seeking to enforce that contract in California. In addition, SB 699 exposes employers to civil remedies that did not previously exist.
Assembly Bill 1076
The latest California law to be enacted is Assembly Bill 1076 (“AB 1076”). On October 13, 2023, Governor Newsom signed AB 1076, which will likewise take effect on January 1, 2024. AB 1076 both amends Section 16600 and adds another section to it. AB 1076 appears to be geared towards non-compete provisions as that term is repeatedly and solely used throughout the bill.
As for amending Section 16600, the statute now provides that it will be “read broadly” to void the application of “any non-compete agreement in an employment context, or any non-compete clause in an employment contract, no matter how narrowly construed, that does not satisfy an exception in this chapter.” In addition, Section 16600 now provides that it is “not limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.” While the exact intent of this latter provision is unclear, it is likely referring to an agreement between two businesses that restricts competition, and a competitor seeks to declare that agreement unenforceable because the competitor wishes to engage in business with one of the two businesses.
In addition, AB 1076 adds Section 16600.1 to the Code. Section 16600.1 provides that it is “unlawful” to require an employee to enter into a non-compete agreement that does not fall into one of the three statutory exceptions. In addition, Section 16600.1 mandates that employers notify current employees, in addition to former employees who were employed after January 1, 2022, that a non-compete provision in their employment agreement is void, unless the provision satisfies one of the three statutory exceptions. Employers must make this notification by February 14, 2024. In addition, employers must notify current and former employees by way of a “written individualized communication” to their last known address and email address. Finally, Section 16600.1 provides that a violation of this Section constitutes an act or unfair competition under California Business and Professions Code Section 17200, which can carry civil penalties.
Take-Aways
In some respects, AB 1076’s amendments and additions to Section 16600 are not surprising because California has long disfavored non-compete agreements. However, the requirement that employers take affirmative action to notify employees of void non-compete provisions is new. Therefore, employers who have or had employees working or living in California since January 1, 2022 should take immediate action to review their employment agreements for a non-compete provision that is not compliant with these laws and notify current and former employees as set forth above by February 14, 2024. It would also be prudent for employers to keep a record of these notifications. In addition, employers should draft and execute new employment agreements with employees working or living in California so they do not violate these new laws and expose themselves to damages, attorney’s fees, and/or civil penalties.
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.
