California recently enacted two pieces of legislation, which further restrict non-compete agreements. On September 1, 2023, California Governor Gavin Newsom signed Senate Bill 699, which prohibits an employer or former employer from enforcing a non-compete agreement in California regardless of whether the contract was signed in California, or whether it was signed in connection with employment that occurred outside of California. The law will go into effect on January 1, 2024.
In addition, on October 13, 2023, Governor Newsom signed Assembly Bill 1076, which imposes a notice requirement on employers and makes it unlawful to include a noncompete clause or require an employee to enter a non-compete agreement unless the noncompete satisfies one of California’s limited exceptions.
Senate Bill 699 amends California Business & Professions Code Section 16600, which voids non-compete agreements except in limited circumstances, such as agreements concerning the sale of a business. Senate Bill 699 adds Section 16600.5 to the Business & Professions Code and expands this prohibition to contracts signed outside of California. If a contract is void under Section 16600, then it is unenforceable in California regardless of where and when the contract was signed.
The Legislature put some “teeth” into this new law. Under Section 16600.5, an employer violates the law if it enters a non-compete agreement that is void under California law or attempts to enforce a void non-compete. The law provides a private right of action for employees, former employees, or prospective employees. They may recover injunctive relief, actual damages, or both, and reasonable attorney’s fees and costs.
The legislative findings for Senate Bill 699 explain that California public policy voids every contract that restrains a person from engaging in a lawful profession, trade, or business, except under limited circumstances, in order to fuel “competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.” They further explain that California employers face challenges from employers in other states who attempt to prevent the hiring of former employees and that California has a “strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ . . . .” The new Section 16000.5 echoes California courts which have clearly stated that “California’s public policy against” non-competes and any restraint of trade “trumps other state laws when an employee seeks employment in California, even if the employee” has signed a non-compete clause while living outside of California and working for a non-California employer.
Additionally, Assembly Bill 1076 adds Section 16600.1 to the California Business and Professions Code. This Section makes it unlawful to include a noncompete clause in an employment agreement or require an employee to enter a noncompete that does not fall within one of the limited exceptions set forth in the statute. Further, Assembly Bill 1076 imposes a notice requirement on employers; it requires employers to notify current employees and former employees employed after January 1, 2022, who are subject to an unlawful non-compete agreement that the non-compete is void by February 14, 2024.
California employers should be aware of these laws when fielding non-compete challenges from out-of-state employers attempting to enforce agreements in California. In light of an environment increasingly hostile to non-competes as exemplified by the restrictions many states have imposed on such agreements, employers should obtain legal advice whenever they are considering implementing or enforcing a non-compete in any jurisdiction and should avoid non-competes for California employees altogether, unless they fit in a limited exception. NFC will continue to track this law and report on any updates.
If you need assistance complying with this new law or have any questions on non-compete agreements in California or other jurisdictions, please reach out to the NFC Attorney with whom you typically work or call us at 619-292-0515.