Are you a California resident? Are you aware that non-compete and non-solicitation agreements are illegal and unenforceable if you live in California? Even if your employer is from out of state? Even if the agreement was signed years ago?
If you didn’t know any of these things, then this article is for you.
If you are a California resident, you have been protected by all these laws since 2008. An update expanding these laws will come into effect in early January that will cover even non-California residents. And if you didn’t already know, the FTC (Federal Trade Commission) is banning these types of agreements in early 2024 as well. All previously signed non-compete and non-solicitation agreements will soon be null and void across the USA (January 2024).
Employers, get ready to revamp those agreements.
- Starting January 1, 2024, California Senate Bill (SB) 699 will enact a significant expansion of the state’s existing prohibition on noncompetition and non-solicitation agreements for the majority of employees.
- Clear guidance from California courts establishes that the state’s public policy against restraint of trade takes precedence over other state laws when an employee pursues employment in California, even if the employee initially agreed to the contractual restraint while residing outside the state and working for a non-California employer.
- As a result, employers may now face legal action, including claims for injunctive relief, actual damages, and attorneys’ fees and costs, for attempting to enforce a noncompetition agreement signed outside of California governing employment that was maintained outside of California.
For numerous decades, California has consistently maintained one of the most employee-friendly stances nationwide regarding noncompetition and non-solicitation agreements—broadly, such agreements following employment are categorically prohibited. In a definitive statement on the matter in 2008, the California Supreme Court emphatically declared that “in 1872 California settled public policy in favor of open competition … Today in California, covenants not to compete are void, subject to several exceptions…” Now, this commitment to open competition and the free movement of employees is more robust than ever, exemplified by ambitious new legislation poised to outlaw noncompetition agreements impacting any entity or individual with even remote ties to California.
Starting January 1, 2024, the recently enacted Business and Professions Code Section 16600.5 navigates uncharted territories in competition regulation while reiterating California’s core and steadfast dedication to open competition. The noteworthy findings of the California Legislature in support of this new legislation not only underscore its significance but also offer valuable guidance to courts tasked with its enforcement. Among them:
- Employers pursuing frivolous noncompete litigation have a chilling effect on employee mobility.
- California’s public policy provides that every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind is, to that extent, void, except under limited statutory exceptions*. California has benefited significantly from this law, fueling competition, entrepreneurship, innovation, job and wage growth, equality, and economic development.
- Noncompete clauses are associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.
- As the market for talent has become national and remote work has grown, California employers increasingly face the challenge of employers outside of California attempting to prevent the hiring of former employees.
- California courts have been clear that California’s public policy against restraint of trade law trumps other state laws when an employee seeks employment in California, even if the employee had signed the contractual restraint while living outside the state and working for a non-California employer.
- California has a strong interest in protecting the freedom of movement of persons whom California-based employers wish to employ to provide services in California, regardless of the person’s state of residence. This freedom of employment is paramount to competitive business interests.
Section 16600.5 boldly declares that “Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.” This all-encompassing prohibition is applicable “regardless of whether the contract was signed and the employment was maintained outside of California.” Furthermore, employers are explicitly barred from entering into noncompetition agreements (where previous law only deemed them void against public policy without an affirmative prohibition) or attempting to enforce such agreements. Employees possess a private right of action to uphold the law and can secure injunctive relief, actual damages, and attorneys’ fees if successful. This establishes a framework where virtually any employer, employee, or potential employee falls under the purview of Section 16600.5.
The practical ramifications of this expansive addition to statutory protections prohibiting noncompete agreements in California are profound. Prior to Section 16600.5, an employer with its main office (or incorporation) outside of California could not enforce post-employment noncompetition agreements on its California-based employees, but it could do so for non-California employees if allowed by the laws of other states. With the introduction of Section 16600.5, California-based employees continue to be shielded from noncompetition agreements, and now, non-California employees are presumably safeguarded under California law against void provisions in their noncompete agreements—even if those agreements were established with non-California companies—should they later pursue or secure employment in California. It’s worth noting, however, that the statute does not seem to negate the well-established duty of loyalty that employees owe to employers during their employment, nor does it appear to impact employee obligations related to trade secrets.
The extent of Section 16600.5, particularly its potential extraterritorial application, will inevitably be scrutinized and clarified as legal disputes involving the statute unfold in California courts.
In the interim, however, employers with a presence in California seeking to hire employees nationwide, those lacking any California presence but intending to hire individuals in California for various roles, and those without a California presence but planning to hire residents for fully remote positions should immediately discontinue their use of noncompetition and non-solicitation agreements to protect themselves from hefty court fines and fees.
Should Governor Gavin Newsom approve Assembly Bill (AB) 1076, a complementary legislation, Section 16600.5 may pose significant challenges. AB 1076 would require employers to inform current and former employees in writing by February 14, 2024, that any previously entered non-competition clause or agreement is void.
While the complete repercussions of Section 16600.5 remain uncertain, employers can anticipate California to lead the charge against noncompetition agreements, irrespective of eventual federal regulatory decisions (refer to Holland & Knight’s prior alert, “FTC Moves to Ban Non-Competes: What Employers Need to Know Now,” Jan. 6, 2023).
*Statutory exceptions to Section 16600 include restrictive covenants in the sale or dissolution of corporations, partnerships, and limited liability corporations.