2023 has seen its fair share of headlines with respect to developments in non-competition law: in January, the Federal Trade Commission proposed a rule that would ban most non-competes; in May, the National Labor Relations Board's General Counsel published a memorandum announcing her view that non-competition agreements violate the National Labor Relations Act; in June, the New York State Assembly passed legislation prohibiting non-competition agreements (though that bill has yet to be signed into law by Governor Hochul); and on July 1, a new Minnesota law took effect banning most post-employment non-competition agreements. Then, in September and October, and notwithstanding the fact that California's ban on non-competition agreements has been codified for over 150 years, it re-entered the fray, with Governor Newsom signing into law two new non-compete bills — SB 699 (on September 1, 2023) and AB 1076 (on October 13, 2023). Both laws take effect on January 1, 2024 and – individually and collectively – add additional requirements and penalties to California's existing statutory framework prohibiting contracts that restrain trade, including employee non-competes.
California Business and Professional Code §§ 16600 - 16607 already renders void and unenforceable agreements that restrain California employees from engaging in any lawful profession, trade, or business, subject to very limited exceptions (mostly in the sale of business context). Adding some bite to the law, effective January 1, 2024, employers are expressly prohibited, pursuant to AB 1076, from entering into non-competition agreements with California employees that are void under California law and, pursuant to SB 699, from attempting to enforce any non-competition agreement that is void under California law, regardless of whether the agreement was signed in connection with employment maintained outside of California. Notably in this regard, SB 699 purports to bar enforcement of non-competition agreements entered into between parties located outside of California if the employee has since then relocated to California or is otherwise seeking employment with a California company.
Additionally, AB 1076 requires employers, by no later than February 14, 2024, to send individualized notices to current employees and former employees (if they were employed after January 1, 2022) who entered into an agreement with a non-compete clause that is void under California law.
In addition to these prohibitions and requirements, SB 699 creates a private cause of action permitting a prevailing employee, former employee, or prospective employee to be awarded injunctive relief, actual damages, and reasonable attorneys' fees and costs, and AB 1076 makes violation of 16600 an act of unfair competition, further exposing an employer to liability.
Despite the rapidly nearing effective date for these new laws, and the high stakes for employers found to be in violation, there are still outstanding questions. For example, it is unclear whether the laws' new prohibitions and requirements extend to non-solicitation agreements, though given California's past jurisprudence, we believe it likely that they will be interpreted as at least applying to customer non-solicitation provisions. The new laws also do not address California Labor Code § 925, which had on occasion (albeit in a limited number of cases outside of California) been found to support enforcement of a non-competition agreement entered into by a California employee if the agreement was governed by another state's laws and the employee was represented by counsel during contract negotiation. Likewise, it is not clear whether the broad language of SB 699 would in fact restrict California-based employers from entering into non-competition agreements with employees located outside of California. We expect future litigation to bring some clarity in these areas and we will be monitoring the legal landscape closely.
Next Steps for Employers
In the meantime, employers located in California, as well as employers located outside of California that currently have, or previously had, employees in California, should prepare for the February 14th deadline by immediately reviewing their employee agreements with non-compete provisions to (1) determine their permissibility under California law, including as recently amended, and (2) compile a list of current and former employees who must receive notice under AB 1076.
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