California’s Non-Compete Shakeup

California enacted two new bills expanding the scope and consequences of the state’s policies against restrictive covenants.  Governor Newsom signed Senate Bill 699 into law on September 1, 2023, and Assembly Bill 1076 into law on October 13, 2023.  Both are designed to strengthen the protections in California Business and Professions Code Section 16600, which 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 long interpreted Section 16600 to render noncompete clauses void, and many have recently begun interpreting the statute to negate employee nonsolicit agreements as well.  These two new laws amend Section 16600, create two new statutes within the same chapter (Sections 16600.1 and 16600.5), and significantly increase the stakes for employers with restrictive covenants in their contracts.

SB 699 creates Business and Professions Code Section 16600.5, which provides that any contract that is void under Section 16600 is unenforceable “regardless of where and when the contract was signed.”  While this provision clearly intends to apply California rules to contracts and employees outside of California, it should still be subject to standard choice-of-law analyses.  Companies outside of California generally have contracts that call for the application of their own state’s laws.  California courts respect those clauses unless the contracts contradict a strong public policy, such as California’s aversion to restrictive covenants.  In recent cases California courts have examined the connections between the parties and the proposed forum states and have applied the law of the state with a greater interest in enforcing its law.  If neither the employer nor the employee has significant connections to California, California law should not apply regardless of what these new laws say to the contrary.

Application of California law to matters wholly within another state also raises constitutional concerns.  A state law that places an undue burden on interstate commerce that exceeds the local benefits of the law runs afoul of the “dormant commerce clause.”1  California’s attempt to extend the reach of Section 16600 into other states may therefore face constitutional challenges to its enforcement.

Section 16600.5 further provides that employers may not enter into a contract with an employee or prospective employee that includes a provision that is void under Section 16600, and further provides that any company that enters into or attempts to enforce such a contract “commits a civil violation.”

The new statute also creates a private right of action for employees whose agreements include restrictive covenants and provides for an award of attorney’s fees for any current, former, or even prospective employee who successfully brings suit over an employer’s use of those restrictive covenants.  Prior to this new law, most courts directly addressing the issue held that the inclusion of restrictive covenants did not create a right of action against employers. That private right of action is now directly encoded into the new Section 16600.5, as are the remedies of injunctive relief, damages, and attorney fees for prevailing employees.

AB 1076 both amends Business and Professions Code Section 16600 and creates another new statute, Section 16600.1.  The amended Section 16600 confirms California precedent that any noncompete clauses, no matter how narrowly tailored, are void unless they satisfy a statutory exception.  It also provides that the application of Section 16600 “shall not be limited to contracts where the person being restrained from engaging in a lawful profession, trade, or business is a party to the contract.”  While the interpretation of this new clause is far from clear, it may be targeting business-to-business agreements, which California’s Supreme Court recently confirmed were to be analyzed under a rule of reason test rather than being declared void per se under Section 16600.2

Finally, the new Section 16600.1 declares it unlawful to include a noncompete clause in an employment contract and requires that any companies whose contracts included a noncompete clause issue a notice to all current employees and former employees who were employed after January 1, 2022, that the noncompete clauses in their contracts are void.  The deadline for this notice is February 14, 2024.

While California employers have known for some time that they cannot enforce noncompete agreements against California employees, these new laws expand both the scope of these restrictions and the potential consequences for violating them.  These changes may also create additional risks beyond those immediately apparent from the text of the statutes.  Employers are advised to consult with experienced counsel to discuss the potential ramifications of these new statutes for their contracts and business practices.

See Footnotes

1 Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

2  Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1150 (2020).

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.