For more than a century, California Business and Professions Code Section 16600 (Section 1600), California law has sounded an emphatic message to companies and employers: any covenant restricting employees from pursuing lawful professions, trades, or businesses is void. That message will soon become stronger with two new (and pivotal) non-compete laws: Senate Bill 699 (SB 699) and Assembly Bill 1076 (AB 1076), both set to go into effect January 1, 2024. SB 699 and AB 1076 have wide reach – beyond the borders of the state of California – and impose a number of novel and unique requirements, prohibitions and penalties on employers. Understanding these shifts is not just a matter of legal diligence; it is an urgent necessity for employers nationwide.
Senate Bill 699
SB 699 adds a new subsection to Section 16600, codified as Section 16600.5, which expands California’s current law in two ways.
First, Section 16600.5 restricts the enforceability of non-compete agreements that are executed outside of California. SB699 prohibits out-of-state employers from enforcing non-compete agreements in California regardless of when and where the agreement was signed. In other words, an agreement that is entirely legal in the state where it was executed will not be enforceable in California as of January 1, 2024. Moreover, Section 16600.5 applies with equal force to existing non-compete agreements as well as future agreements.
By way of illustration, let’s assume a Texas employer enters into a non-compete agreement with its Texas employee in the state of Texas that is valid and lawful under Texas law. Later, and in violation of the terms of the non-compete agreement, the Texas employee accepts a position with a California company in California. Under Section 16600.5, the Texas employer is prohibited from enforcing the non-compete agreement against its former employee in the state of California, regardless of when the Texas non-compete agreement was entered into or its continuing legality and enforceability outside of California.
Second, Section 16600.5 provides that an employer who attempts to enter into or enforce a non-compete agreement that is void under California law commits a civil violation, and creates a private right of action for current, former and prospective employees against the employer. Previously, violations of California’s non-compete laws have generally been litigated as declaratory relief actions seeking to obtain a declaration that voids the employer’s contractual non-compete provision(s). Section 16600.5 increases employers’ risks by allowing California-based employees to not only avoid entering into and block enforcement of non-compete agreements against them, but also to seek injunctive relief and monetary damages for violations of Section 16600. The new law also entitles prevailing plaintiffs to recover attorney’s fees and costs incurred.
The private right of action is not limited to claims against California employers. Thus, considering our earlier illustration, the Texas employer could be sued under the new California law for trying to enforce the Texas non-compete agreement in California. In fact, although it is not clear on the face of the new statute, some commentators even believe that out of state employers, like our hypothetical Texas employer, who try to enforce the non-compete in an out of state court (such as in Texas) could likewise be sued by the employee in California under the new law.
Undoubtedly, Section 16600.5’s expansive reach will face a number of legal challenges in the months, or years, to come. As it stands, all employers – even those outside of California – should be aware that their non-compete provisions are invalid in California, and that any attempt to enforce said provisions within California could expose them to significant risks.
Assembly Bill 1076
AB 1076 modifies Section 16600 in two ways.
First, AB 1076 amends Section 16600’s existing language to instruct that the statute is to be read broadly and in accordance with the 2008 California Supreme Court decision, Edwards v. Arthur. The added language is said not to be a “change” in the existing law but rather declaration of the existing law and California’s staunch position that non-compete employment agreements are void in California regardless of how narrowly tailored they are.
Second, AB 1706 also adds a new subsection to Section 16600, codified as Section 16600.1, under which employers will be required to notify all current employees (and all former employees who were employed as of January 1, 2022), that entered into a non-compete agreement or contract with non-compete clause, that the agreement or clause is void. The notice must be an individualized communication and sent to employee’s last known address and last known email address by no later than February 14, 2024. In addition, the notice must specifically reference and describe the agreement, or clause, that is void. Notably, this notice requirement applies to out-of-state employers with current or former employees, that have moved, or are working remotely, in the state of California. One question that remains unanswered is whether employees will need to send notice to employees who move or begin working in California after the statue’s February 14, 2024, notice deadline, although some commentators advise doing so in a timely manner thereafter in order to minimize risks.
Employers who neglect to send the requisite notice face steep consequences. Section 16600.1 provides that a violation is an act of unfair competition under Section 17200 of California’s Business and Professions Code, which exposes employers to lawsuits seeking a number equitable remedies including declaratory judgment, disgorgement and injunction. It is plausible that a violation of 16600.1 could constitute violations of other California laws, allowing an employee to recover any attorneys’ fees incurred in an action against an employer who does not comply with the notice requirements. Accordingly, it is imperative that all employers review all their employment agreements to determine if they are subject to the notice provision, and if so, that they comply with the notice requirements for any current or former employees working in the state of California.
Employers, Don’t Underestimate These Laws’ Significance
As we approach the new year, employers must not underestimate the significance of California’s new non-compete laws. The combination of SB 699 and AB 1076 demands swift action, a comprehensive understanding of the changes, and strategic compliance efforts. The penalties for non-compliance can be substantial, and these changes demand a proactive and meticulous approach from employers. Given the novelty and complexity of California’s current legal landscape, employers and business -even those outside of California – are strongly encouraged to work closely with legal counsel to minimize risk.