California Updates Noncompete Restrictions

California Updates Noncompete Restrictions

Introduction

Noncompete agreements have long been void in California, and the law continues to develop and reinforce noncompete restrictions. On September 1, 2023 and October 13, 2023, Governor Gavin Newsom signed S.B. 699 and A.B. 1076, respectively, which both expand on noncompete restrictions.[1] S.B. 699 and A.B. 1076 go into effect on January 1, 2024.

 

History of the Law on Noncompete Agreements

Under common law, noncompete agreements were valid, as long as they were reasonably imposed.[2] However, this was rejected in 1872 when the predecessor sections to Business and Professions Code sections 16600 through 16602 were enacted.[3] Since 1872, noncompete agreements have been void in California, unless specifically authorized by sections 16601 or 16602.[4]

Section 16600 provides, “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”[5] The chapter excepts noncompetition agreements in the sale or dissolution of corporations (§ 16601), partnerships (§ 16602), and limited liability corporations (§ 16602.5).[6] The existing law regulates business activities in order to maintain competition and voids noncompete provisions.[7]

 

New Additions to the Law

S.B. 699, which adds Section 16600.5 to the Business and Professions Code, establishes that noncompete agreements are void in California, regardless of where the employee worked when the agreement was entered and/or where the agreement was signed.[8] In addition, S.B. 699 makes it a civil violation for an employer to attempt to enforce a noncompete agreement.[9] It also enables an employee, former employee, or prospective employee to bring a private action to enforce this chapter for injunctive relief or the recovery of actual damages, or both, and reasonable attorney’s fees and costs.[10] S.B. 699 expands the law on noncompete agreements by protecting the freedom of movement of persons and freedom of employment of persons.[11] Considering the growth of remote work, this law will greatly help protect California’s business interests in maintaining competition.

A.B. 1076 amends Section 16600 and adds Section 16600.1 to the Business and Professions Code. Section 16600 now codifies the case law set forth in Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937 by specifying the statutory provision voiding noncompete contracts is to be broadly construed to void the application of any noncompete agreement or clause in an employment context, no matter how narrowly tailored, that does not satisfy specified exceptions.[12] The bill makes these provisions applicable to contracts where the person being restrained is not a party to the contract.[13] Additionally, Section 16600.1 will require employers to notify current and former employees in writing by February 14, 2024, that any noncompete clause or agreement with the employer is void.[14] A violation of this section will constitute an act of unfair competition within the meaning of Chapter 5.[15] A.B. 1076 expands the law on noncompete agreements by adding a requirement for employers and repercussions for noncompliance, which in turn forces employers to obey the law.

 

Key Takeaways

Together, S.B. 699 and A.B. 1076 reinforce California’s law voiding noncompete agreements. Going forward, employers in California will need to ensure that all employment contracts and employee handbooks do not contain noncompete provisions. If the contracts or handbooks do contain noncompete provisions, employers will need to notify current and former employees that any noncompete clause is void. If employers are not in compliance with the new law, employees can bring a private action against the employer, and/or the employer could face unfair competition liability.

 

 

Keep Reading

Sources


[1] CA LEGIS 157 (2023), 2023 Cal. Legis. Serv. Ch. 157 (S.B. 699); CA LEGIS 828 (2023), 2023 Cal. Legis. Serv. Ch. 828 (A.B. 1076).

[2] Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288.

[3] Ibid.

[4] Ibid.

[5] Cal. Bus. & Prof. Code § 16600.

[6] Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937, 945-46.

[7] CA LEGIS 828 (2023), 2023 Cal. Legis. Serv. Ch. 828 (A.B. 1076).

[8] CA LEGIS 157 (2023), 2023 Cal. Legis. Serv. Ch. 157 (S.B. 699).

[9] Ibid.

[10] Ibid.

[11] 2023 California Senate Bill No. 699, California 2023-2024 Regular Session, 2023 California Senate Bill No. 699, California 2023-2024 Regular Session.

[12] CA LEGIS 828 (2023), 2023 Cal. Legis. Serv. Ch. 828 (A.B. 1076).

[13] Ibid.

[14] Ibid.

[15] Ibid.