California has long been notorious for having a law, backed by public policy, prohibiting employee noncompete provisions except in very limited circumstances. Effective January 1, 2024, it even more aggressively furthers this stance.
The Legislature noted that noncompete clauses remain common in the United States, with approximately 20 percent of workers nationwide subject to such a restriction. It went on to state that even California employers continue to have employees sign noncompete clauses that are clearly void and unenforceable. Given that the market for talent has become national and remote work has grown, the Legislature also observed that California employers have increasingly faced the challenge of employers outside of California attempting to prevent the hiring of former employees. It cited research that noncompete clauses stifle economic development, limit firms’ ability to hire, depress innovation and growth, and are associated with suppressed wages, exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.
It went on to observe that California courts had made it clear that the state’s public policy against the restraint of trade trumps other state laws when an employee seeks employment in California, even if the employee signed the contractual restraint while living outside California and working for a non-California employer. Given California’s 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, it is perhaps not surprising that on Labor Day weekend 2023, the Governor signed S.B. 699 into law, adding Business and Professions Code 16600.5.
The new law specifically makes any prohibited noncompete provision void regardless of where and when the contract was signed. It further prohibits an employer or former employer from even attempting to enforce a contract that is void under the noncompete prohibition, regardless of whether the contract was signed and the employment was maintained outside of California. Significantly, it prohibits an employer that enters into a contract that is void under this law.
The new law adds teeth to this prohibition. While prior remedies included the possibility of injunctive relief and provable damages, under the new law, an employer that violates the law is committing a civil violation. A current or former employee, or prospective employee, can bring a civil lawsuit not only seeking previously available remedies, but attorney’s fees and costs.
Of course, California-based employers with California-based employees need to review any noncompete provisions and take remedial action. However, out-of-state employers who may recruit or employ employees who perform work in California, or who have a former employee who moves to California to work for a competitor, also need to be cognizant of the new law and the threat of a civil lawsuit in California that could result in a significant award of fees and costs. Further, to the extent that an employee can assert that the employer, wherever located, imposed this restriction on a group of current, prospective, or former California employees, employers face the threat of a class action.
While there are potential defenses to the new law, their persuasiveness in a California court is unclear. California has a presumption against the extraterritorial application of its state laws, dating back to 1916. The presumption can be rebutted, however, where a contrary intent is “clearly expressed” or “reasonably to be inferred from” the language of the law or its purpose, subject matter, or history. Here, it certainly appears that there is an argument that the presumption is subject to rebuttal, given the language of the new law and its stated legislative purpose. Out-of-state employers attempting to rely on the commerce clause, by arguing that a state law places an undue burden on interstate commerce that exceeds the local benefits of the law, may also have an uphill battle. The California Legislature attempted to undermine this argument by anchoring the new law, in part at least, on the position that the law actually frees up commerce by allowing employees to move freely and continue to practice their trade or profession. None of which, of course, heads off the likely lawsuits between employees and employers, or between employers and employers in this renewed hot area of attention.
There are still things that employers can and should do to prevent unfair competition, including the protection of their trade secrets.
