ARTICLE
18 September 2023

Will California's New Statute Invalidating Non-Compete Agreements Be Subject To Constitutional Challenge?

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Allen Matkins Leck Gamble Mallory & Natsis LLP

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Allen Matkins, founded in 1977, is a California-based law firm with more than 200 attorneys in four major metropolitan areas of California: Los Angeles, Orange County, San Diego, and San Francisco. The firm's areas of focus include real estate, construction, land use, environmental and natural resources, corporate and securities, real estate and commercial finance, bankruptcy, restructurings and creditors' rights, joint ventures, and tax; labor and employment, and trials, litigation, risk management, and alternative dispute resolution in all of these areas. For more information about Allen Matkins please visit www.allenmatkins.com.
Article I, Section 10 of the United States Constitution prohibits a state from passing any law impairing the obligation of contracts.
United States California Employment and HR

Article I, Section 10 of the United States Constitution prohibits a state from passing any law impairing the obligation of contracts. A similar prohibition is found in Article 1, Section 9 of the California Constitution. This prohibition extends to contracts of employment. Cal Fire Loc. 2881 v. California Pub. Employees' Ret. Sys., 6 Cal. 5th 965, 977, 435 P.3d 433, 441 (2019).

The courts have held, however, that not every law that affects a contract constitutes an unconstitutional impairment. The law must operate "as a substantial impairment of a contractual relationship." Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 (1978). California's recently enacted SB 699 appears to cross this line as there can be no greater impairment of a contractual obligation than to declare a contract unenforceable. Certainly, the inability to enforce a contract interferes with a party's reasonable expectations. See Newly Minted California Law Tautologically Declares Void Noncompete Agreements Unenforceable Regardless Of Where They Were Signed. If a contract is substantially impaired by a state law, the courts will assess whether the state law is drawn in an "appropriate" and "reasonable" way to advance "a significant and legitimate public purpose. Sveen v. Melin, 138 S. Ct. 1815, 1822 (2018).

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