United States: California's One-Two Punch: New Law Further Strengthens State's Noncompete Ban

On October 13, 2023, California Governor Gavin Newsom signed into law Assembly Bill 1076, which further expands the claims and remedies against California employers for noncompete agreements that violate state law and requires employers to provide individualized notice to employees and former employees who are parties to noncompete agreements that violate California law. The enactment of this law, on the heels of the enactment of Senate Bill 699 (see our previous Alert), further reinforces the state's strong policy of prohibiting noncompete agreements in any form.

The new law:

• Requires employers to notify, in writing by February 14, 2024, current and former employees who were employed after January 1, 2022, that any noncompete clauses or noncompete agreements previously signed by the employees are void (the "notice requirement");
• Makes an employer's failure to provide such notice and/or inclusion of a noncompete clause in an employment contract and/or requirement that an employee enter into a noncompete agreement that does not satisfy a statutory exception a per se act of unfair competition under California's Unfair Competition Law;
• Codifies case law voiding the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy a statutory exception; and
• Extends application of the ban on noncompete agreements to include situations where the person being restrained from engaging in a lawful profession, trade or business is not a party to the contract.

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 noncompete 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 noncompete agreements entered into by the seller of a business or by a member or partner of a business.

When Does the Law Take Effect?

The law goes into effect on January 1, 2024, and will be codified as amended Section 16600 and new Section 16600.1 of the California Business and Professions Code.

Who Is Covered by the Law?

Read in tandem with Senate Bill 699, the law applies to all employers that enter into a noncompete agreement with a California employee or attempt to enforce a noncompete agreement against a California employee or prospective employee, regardless of the state in which the employee signed the agreement or worked. Outside of the employment context, Section 16600 applies to anyone entering into a contract governed by California law.

Which Types of Agreements Are Covered?

Section 16600, as amended, applies to all contracts, regardless of whether the contract is between an employer and employee. Section 16600.1 applies to a noncompete clause in an employment contract.

The text of amended Section 16600 states that it shall be read broadly, in accordance with Edwards v. Arthur Andersen LLP, (2008) 44 Cal.4th 937 (2008). As set forth above, in the aftermath of Edwards, California courts have consistently held that Section 16600 applies to post-employment noncompete 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.

Are There Any Exceptions to the Law?

The only exceptions to the prohibition in Section 16600 are for noncompete 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 recently enacted Senate Bill 699 specifically addressed out-of-state noncompete agreements by prohibiting employers from attempting to enforce them against California employees.

What Are the Consequences If an Employer Violates the Law?

An employer's failure to satisfy the notice requirement is a per se act of unfair competition under the Unfair Competition Law. Violators may be subject to enforcement actions by the attorney general or other local agency attorneys and/or a private right of action for injunctive relief or restitution.

What This Means for Employers

Employers with employees in California who signed contracts with noncompete provisions should consult with counsel to review existing agreements applicable to California employees and to discuss ways to satisfy the notice requirement.

For More Information

If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, Deanna J. Lucci, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.