On September 1, 2023, California Governor Gavin Newsom signed into law Senate Bill 699, which reinforces the state's prohibition of employee noncompetition agreements and expands the claims and remedies against California employers for noncompetition agreements that violate state law.
The new law provides that an employer shall not enter into or attempt to enforce a noncompetition agreement with an employee or prospective employee that is void under Section 16600, et seq., of the California Business and Professions Code―and makes it a civil violation to do so. The new law provides that a noncompetition agreement is void regardless of the state in which and when the agreement was signed. It prohibits an employer or former employer from attempting to enforce a contract that violates the new law, even if the contract was signed outside of California and even if the "employment was maintained outside of California."
The new law permits an employee or prospective employee to file a lawsuit to prevent the employer or prospective employer from enforcing a noncompetition agreement. If the employee files such a lawsuit, the employer could be subject to injunctive relief (an order preventing the employer from enforcing the agreement) and/or the payment of money damages. If the employee prevails in the suit, the new law mandates that the court order the employer to reimburse the employee's reasonable attorneys' fees and costs.
California's new law is the latest in a series of state and federal legislation or proposed regulations aimed at banning and/or limiting such agreements. Read more on the Duane Morris Non-Compete and Trade Secrets Law blog.
Background on California Noncompete Law
California's Business and Professions Code Section 16600 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." California courts have consistently held that Section 16600 applies to post-employment noncompetition covenants and customer nonsolicitation and noninterference covenants. In recent years, a number of California courts have held that Section 16600 also applies to post-employment covenants prohibiting the solicitation or hiring of an employer's employees or independent contractors. The only exceptions are for noncompetition agreements entered into by the seller of a business or by a member or partner of a business.
When Does the New Law Take Effect?
The law goes into effect on January 1, 2024, and will be codified as Section 16600.5 of the California Business and Professions Code.
Who Is Covered by the Law?
The law applies to all employers that enter into a noncompetition agreement with a California employee or attempt to enforce a noncompetition agreement against a California employee or prospective employee, regardless of the state in which the employee signed the agreement or worked.
Which Types of Agreements Are Covered?
As set forth above, the new law applies to all post-employment noncompetition covenants and customer nonsolicitation and noninterference covenants. The California Supreme Court has yet to decide whether Section 16600 applies to post-employment covenants prohibiting the solicitation or hiring of an employer's employees or independent contractors, although a number of California courts have so held in recent years.
Are There Any Exceptions to the Law?
The only exceptions to the prohibition in Section 16600 are for noncompetition agreements entered into by the seller of a business or by a member or partner of a business.
Can the Law Be Circumvented by Applying Another State's Law Under Contract?
No. The new law specifically addresses out-of-state noncompetition agreements by prohibiting employers from attempting to enforce them against California employees.
What Are the Consequences If an Employer Violates the Law?
The law permits an employee, former employee or prospective employee to bring a civil action for injunctive relief and/or the recovery of actual damages. In addition, the law states that "a prevailing employee, former employee, or prospective employee in an action based on a violation of this chapter shall be entitled to recover reasonable attorney's fees and costs."
What This Means for Employers
The new law leaves a number of questions unanswered. For example, it is not clear how the new law will harmonize with Labor Code Section 925, which prohibits an employer from requiring an employee "who primarily resides and works in California" to agree to a provision that would require the employee to adjudicate, outside of California, a claim arising in California or deprive the employee of the substantive protection of California law with respect to a controversy arising in the state.
Section 925 contains an exception for:
[A] contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.
It is also unclear how the new law will impact post-employment covenants prohibiting the solicitation or hiring of an employer's employees or independent contractors. As set forth above, a number of California courts have held that such covenants are covered by Section 16600 of the California Business and Professions Code.
For More Information
If you have any questions about thisAlert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, Deanna J. Lucci, any of the attorneysin our Non-Compete and Trade Secrets Group, any of the attorneysin our Employment, Labor, Benefits and Immigration Practice Groupor the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
